Many times when I go into a home to do an appraisal, the homeowner asks me, “How do you find your comps?” Usually, what they’re really asking is: “You’re not going to compare my house with that house down the street which just sold in foreclosure, are you?”
The answer, like with so many other things, is that it depends. I recently read an article on the appraisal process which said that in most cases, “appraisers are required to include foreclosed and other distressed property sales in the appraisal report. This means the subject property is competing with other property that is most likely in worse condition or had a much lower sales price. Regardless of the opinion of the lender, the buyer or the real estate professional, this is an accurate reflection of the current market.”
So is that really true?
According to the article, I should use the foreclosure sale to accurately reflect the current market. But this is only true in one instance: when foreclosed properties actually do reflect the current market. But how can you tell if that’s the case?
Let’s say, for instance, I appraised a home in a 100-unit subdivision with four foreclosure sales and 21 non-foreclosure sales in the past twelve months. So out of 100 homes, 25% of the homes sold, and of that 25%, only 16% were foreclosures – representing 4% of the entire neighborhood.
On the flip side, what if there were 18 foreclosure sales and only two non-foreclosure sales in the past twelve months? The foreclosures would account for 90% of all the sales, and 18% of the entire neighborhood would have been affected.
In the first case, foreclosure sales would not be an accurate reflection of the current market; in the second case, the distressed sales would reflect the current market and therefore must be used as comparable sales to develop a credible value opinion.
If you want a more detailed understanding, The Appraisal Institute published a paper earlier this year which briefly describes the role of the appraiser, how we determine which sales are the best, and how foreclosure sales are treated. You can read the paper here.
As always, let me know if you have any questions – I’d be glad to help!