States: Don’t use distressed sales as comps

Appraisers in four states — Illinois, Maryland, Missouri, and Nevada –- may not be allowed to consider “distressed sales” (e.g., foreclosures or short sales) when using comps as a part of a residential appraisal. If bills being considered pass, it could put appraisers in the position of choosing whether to violate federal law (Uniform Standards of Professional Appraisal Practice, or USPAP) or these new state laws.

According to the Appraisal Institute, which has the full story:

Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation — which in the case of federally related transactions would be a violation of state law — or to violate the law prohibiting the consideration of distressed sales as comparables.

Not using distressed sales as comps isn’t an entirely new issue. Based on this thread on the Appraisers Forum, the VA doesn’t allow them to be used when appraising its properties. Writes one participant, discussing a job:

The neighborhood has a mixture of short sales, foreclosures, and normal sales. If I used short sales, the value comes in about $165K. If I used normal sales only, the value is about $210K That’s the difference of whether a buyer wants to deal with the hassles of a short sale. […] Short sales are a marketability issue. Its just like dealing with a property that backs up to a highway.

Appraisers, not surprisingly, aren’t thrilled about these bills.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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5 Responses to States: Don’t use distressed sales as comps

  1. Joe Vita says:

    Appraisers shouldn’t use short sales or foreclosures as comparables if they represent a minor share of the local market. If, however, the market is dominated by such sales they must be used as they have definitely influenced property values. Perhaps some guidelines should be adopted to determine at what point they must/may be used. Faulty appraisals will only serve to hurt the real estate market and economy. That we don’t need. Legislators should not regulate what they don’t understand.

  2. Lenn Harley says:

    Not using distressed sales in appraisals is to deny that they exist. This is no different than creating false closed transactions in appraisals.

    Not using short sales or bank owned properties for appraisals may result in too few closed (or no closed transaction) to consider. We faced that situation back in the early 1990s when we would get appraisal reports that said “no closed sales”.

    The market is what the market is. Manipulating appraisals isn’t going to change the fact that some property owners may not net what they had anticipated or what a real estate agent promises. Those foreclosures and short sales are not going to go away by ignoring them.

    Underwriters have access to closed sales too and inflating appraisals by manipulating appraisals isn’t going to get a loan approved.

  3. Rob Waring says:

    Interesting comments but based on incomplete information. If you look at the appraiser’s forum thread, the job being discussed is a liquidation appraisal on VA’s behalf. In that context, use of other “distressed” properties would be indicated based on the age-old concept of like-kind comparables. I have been in the R/E business for over 20 years and have had many experiences and conversations with appraisers on this issue. The vast majority of reputable appraisers I have worked with were more than willing to accept input from Realtors and generally based their valuations on the concept of like-kind; most of the time comps were provided by Realtors. The real issue is one of defining a comparable. We can start with what offer a ready, willing, and able buyer makes. I would make the argument that a buyer pursuing a “deal” is only willing to pay so much for a distressed property and predicates his offer on the condition of the property as well as the fact of dealing with an “indirect” owner such as a bank. This as opposed to a “direct” owner, i.e. an owner/occupant. Indirect owners think completely differently in terms of what they are willing, often by a rather arbitrary formula, to accept for a property and I don’t believe for a minute that they are like-kind comparables for regular resale properties. It’s comparing apples and oranges. I can remember agents and sellers would be greatly upset when appraisers would use a comp where the seller needed to move quickly and would greatly underprice a home just to get out of it. We would try to get the appraiser to look at the seller’s motivation behind that pricing but were not always successful because “seller’s motivation” was difficult to quantify. In our current market, market data reveals distressed property comps and there are a great number of them. Unless there is to be an adjustment taking seller motivation into account they should not be used as comps for regular resales. If this is not done, the people who are taking the hit are those that have kept up their payments and generally the condition of their home. We cannot compare apples and oranges unless we can come up with an adjustment to cover “reason for selling”.

  4. Joe Vita says:

    I’ve been both an appraiser and broker for more than 30 years and it is a very basic fact among appraisers that markets are impacted by local economic conditions. This can work to increase values or decrease values depending on how significant the influence of the economy may be on sales. For example, when a large industry that employed most of the inhabitants of a community shuts down the resulting unemployment negatively impacts property values as it causes a significant over supply as well as a much lower demand. Supply and demand are basic principles of valuation. It makes no difference that there are some in the community that are not affected by the unemployment problem because they are on fixed incomes from retirement, are independently wealthy, or don’t need to sell. Their home values are similarly impacted as they must compete with the large number of REOs. This is the basic principle of subsitution. There are no special considerations for a seller’s motivation that an appraiser takes into consideration in cases like this unless the seller lets his property go at an even lower price than the markets says he should for some reason. Similarly, if more than a majority of a community’s sales for a period of time are REOs the value produced by such sales will have an impact on the marketing of similar properties if they are also REOs or not. It’s possible that not all areas of a market will be dominated by certain conditions. Particular types of properties or some price ranges in the same market may not be impacted as shuld be evidenced by comparable sales. I believe that many real estate agents do not understand valuation concepts as the only exposure they ever had on the subject may have been in a single chapter in their Principles of Real Estate course prior to licensure.

  5. Tim says:

    I am considering challenging the city of Colonial Heights on this issue and would appreciate some input.
    I own 4 very small and identical houses, all on the same street. They are assessed at $80k each. I was told the city uses the previous 18 months of sales data for comps. MLS shows 24 sales over the last 18 months of comps, with an average per square ft price of $71. That translates to a FMV of just $49k for each of my 4 houses.
    The city says I can’t use most of that data because more than half of it are REO’s. They say it’s not under their control and that they are mandated by the Dept of Taxation NOT to use REO’s as comps.
    I would argue that when the market is so dominated by REO’s ( more that 50% of the entire comps in my case) a “fair market value” cannot be obtained without some consideration for them.
    My question for anyone reading this is, would I have any chance in making this case in a circuit court, or would I have to take this issue up with the Virginia Department of Taxation? Combined, this is about $120k in over assessments for me spread between the 4 houses.
    Any insights would be most appreciated.

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