Comparable or not comparable?

[hawkeye]

Ok guys, I would like to see how you would handle this. We are doing an appraisal for divorce. It’s a duplex, however all recent comparable properties within a five mile radius that recently sold are stated to be foreclosures. Selling between 145-180,000. Looking at active current listings (not sales), I see them offered in the low to mid 200,000’s.

Now I was taught that all comparable properties needed to be an Arm length transaction (My Definition: A transaction in which both parties in the deal are acting in their own self interest and are not subject to any pressure or duress. otherwise, the agreed-upon price will likely differ from the actual fair market value of the property.) However, on an unrelated job, I was told by an underwriter that the use of short sales and foreclosures are okay because these are determining factors of current market conditions. However, wouldn’t these properties be considered not to be Arm's length transactions? So, if this was to be construed as being true, and we can use these properties as comparables, and every appraiser out there starts to use short sales and foreclosures as comparables, wouldn’t we now be labeled at fault for deflating the market below fair market value? For now I just want to do the correct thing as this case will be going to court and we will be called to testify. Again, this appraisal is for a divorce case and not for financing but I have no comparables properties within a 5 mile radius that is not a foreclosure due to current market conditions. Thanks in advance for any sound input guys.

 

[Marcia Langley]

hawkeye,

That is a sticky problem and can only be solved with serious research that you can defend with confidence.

In general, it is true that if literally all the sales are foreclosures then they have set the market. There could be mitigating facts to consider such as how long it has been since the last nonforeclosure sale. But you'll need to analyze all sales and listings in depth to make your case in your report.

Be very detailed regarding the listings and analyze whether any of them are foreclosures. Compare the days on market between the sales and the listings and analyze the over supply. Are the listings being lowered periodically? Are they being lowered at the same rate as the broader market decline? How long have they been on the market?

As you research these trends it will probably come clear to you how to best develop a defendable, credible opinion.

 

[The Warrior Monk]

As Marcia noted, it depends.

The conditions under which the properties sold determine what type of value their sales prices represent. Short sales and properties foreclosed on that are subsequently sold often don't represent market value (or fair market value).

 

[J Grant]

first of all, absolutely, foreclosures can be arms length transactions, why not? they meet the definition you yourself put, both parties acting in self inerest, the property exposed to market through MLS, etc. And especially if most of the sales, or all the sales are foreclosures, they ARE the market, and must be used, and reflect economic conditions in the aera. No, you wouldn't be accused of appraising "below the market", if majority, or even a good number of sales are foreclosures, short sales, etcy, that is the market. and a buyer looking for low prices is low your typical buyer ( for that area).

 

[The Warrior Monk]

Short sales are often sold under duress, and can be sold without ever being exposed to the market. The same can happen with foreclosed properties. I've also seen plenty of foreclosed properties sold with conditions that restrict who may buy the property: cash only, first-time home buyer, buyers with incomes below certain thresholds, etc. Market Value and Fair Market Value have specific conditions, and valuing the property with only this sales will not result in a value conclusion that fits those definitions.

If the properties are market just like any other property, and the party isn't under duress to sell, those sales could lead to a Market/Fair Market Value conclusion. That's why it is important to verify the conditions of sale. Since the appraisal may end up in court, it is very important to have all your ducks in a row.

 

[J Grant]

most foreclosures and short sales these days are marketed like any other house, placed on MLS, etc. but if they are marketed differently, like at an auction, then that must be explained. Most foreclosures don't have restrictions who can buy, the bank just wants their money. obviously, the original owner of a foreclosed house gave it up under duress, but the second owner ( the bank, who sold it on the open market ) had typical seller motivation , to sell the house for the best $ they could get to pay off the mortgage, recover any losses etc. at least that is how it works here in Fl, the poster has to look at his own market. again though, if a lot of sales activities are floreclousres and or short sales, then that is the market and they are the best comps, because that is what your subjecct will be competing with if it were placed up for sale. if there are other comps, use them as a balance, are buyers paying any more for them? if so, how much more? but esp in this case, foreclosures are the only comps, so that is the current market.

and every appraiser out there starts to use short sales and foreclosures as comparables, wouldn’t we now be labeled at fault for deflating the market below fair market value? "don't worry about what every appraiser out there is doing, just appaise for your market! And appraisers can't "deflate" a market, they were not supposed to have "inflated" the prior market, either. they are supposed to value the subject according to current market conditions, with some perception of immediate future, re the listings and pendings, and general reserach, are prices still declining or stabilizing, are more people moving into or out of an area, etc)

 

[Terrel L. Shields]

how you would handle this. We are doing an appraisal for divorce

First clue to turning down the assignment. I won't have to worry any further than this stage...but that's just me. Super high liability assignments.

 

[Dave Disselhorst]

In many cases a divorce sale can be considered "non arms length transactions". The two parties in many cases are competing for either the low or the high end of value and are looking to get their money out as quickly as possible to complete the divorce proceedings. I believe a forclosure sale might be the best comparable sale. That being said, you have a lot research to do, and I hope you have some court contingencies in your limiting conditions.

 

[Joshua Fookes]

Great responses from JoAnn

When 40% of your market transactions have some element of REO, foreclosure, pre-forclosure, short sale, type verbage in it, you have to address it.

One word of advice: Talk to a party in the transaction. Broker, buyer, seller, bank rep, servicing company, etc. Try to find out what those "market participants" were doing. Were they selling "fire sale" to get the non performing asset off their books in a hurry? Were they trying to get market value to minimize the losses? Know the details of the sale beyond any quick MLS comment. The more time you spend talking to the market participants the more you can truely say you know your market.

 

[stefan olafson]

I hope you're not using any FNMA forms for the appraisal #1.

Expand your neighborhood to find some truly arms length sales #2

Include as 3rd, 4th, or 5th comparable foreclosure sales #3

Include as your last comparable a short sale #4

EXPLAIN, EXPLAIN, EXPLAIN #5