As a side-bar to this discussion, I just completed a one year trend chart for 'all' A.L., REO & SS sales in one MLS area, and plotted the resulting median prices on an Excel spreadsheet/graph. For the entire year, the Short Sales exceeded the price of the REO's. A.L.'s were the highest price, then SS, then the REO's. I did this to compare with the trend charts in the Live Valuation article which showed similar charts. They are very close.
I do that on market and subject sub-market basis on pretty much every job. I use it to derive an adjustment for the REO's and Shorts.
The situation you describe is entirely typical. Generally, what you see is the regression line for the Resales at some level, the REO's line $30-$60/SF lower, and the Shorts somewhere in between. Generally, for an adjustment I look at something between 1/3rd and 1/2 of of the price differential between the REO's and the Resales as my adjustment. My rationale is thus.
Amongst these three separate groups of properties you have resales which are dominantly owner occupied, minimal deferred maintenance, in decent condition, with responsive owners that can provide disclosures and that are capable of closing escrow in a short and predictable amount of time. Amongst the Shorts, you dominantly have owner occupied, minor deferred maintenance, and disclosures available, but you're at the mercy of banks WRT to responsiveness to offers and you have minimal ability to predict a reasonable time line for the buyer taking possession. Some will argue that the banks are doing better with this, and that maybe be true, but nonetheless the stigma exists, and no agent in their right mind will show their clients Shorts and REOs if they under pressure to move because of a transfer or something like that. That predictability and flexibility of the traditional seller is worth something in the market place. REOs share all of the short comings of the Shorts, plus overall poorer condition.....some times much poorer. If you'll notice, the distressed sales deficits break out to categories 1) Transactional Conditions, and 2)Quality and condition issues. Since in the sales grid we typically adjust for quality and condition separately, its unreasonable to use the full differential between the Resales and REOs on the trend analysis to adjust the REO's; you'd be double dipping on quality and condition....worse, you'd be ignoring the actual quality and condition of the subject in favor of a regressed average. However, since the Shorts are basically all category 1 (transactional) with minimal Category 2 (QnC) influences, the short sale regression line provides an important clue to the market reaction to the Category 1 influences. Since the Short line is usually about 1/2 way between the Resale and the REO, but usually nearer the Resales, that's how we come up with the 1/2 to 1/3rd rule of thumb. I base the adjustment on the REO line instead of the Short sale line all by itself, because there's usually about 10 times as many REOs as Shorts so the data is more solid.
