Comparisons

[xmuyb6rt]

There is a house across the street from mine. The family in the house was unable to keep up the mortgage, and the bank took the house back and sold it a year later for $10,000 less than what it sold for two years previous.

This house is in a new subdivision where all the houses are three years old or less and property values are going up every year.

I think that, because of the circumstances surrounding its sale, the use of this house as a comparison to a subject property in the same neighborhood would result in an inaccurate valuation.

My questions are these:

Wouldn't an appraiser want to avoid using this house as a comparison?

And, if so, how do appraisers avoid using comparables that have been sold under such conditions? How would they know of the circumstances surrounding a "distressed" property?

Thanks,

Shaun

 

[Jeff Horton]

I can only speak for my area. But my data source for sales states if the house has a right of redemption. Meaning it was foreclosed and the owner has 3 years in which he can buy it back.

I would assume and this may not be the case depending on where you are, that if the appraiser was getting his data from public records there would be two clues. One the bank could shown as the owner at time of the sale. The deed or other records could provide clues to the foreclosure.

Another thing is that since the appraiser typically uses three comparable sales and probably looks at many more if it did sale below market value there is a good chance the appraiser will notice that something is not right. I have had that happen, then find out there was something out of the ordinary about the sale.

 

[Restrain]

When I am reviewing sales, I look at the information in the MLS. Often it will say "Foreclosure", "Corporate Owned", "Special Key Required", "Special Addendums Required". These raise red flags. Also, you will see a sharp drop in asking price if it takes over 30 days to sell.

As such, I do not consider these as "typical sales" for a home on the market. However, in some very distressed markets, foreclosures ARE the market. I've seen this before.

You say that the price in the neighborhood is going up and the builder is still there. Just because the builder is getting $XXXXXX for a new home doesn't mean that yours is worth that. The builder is probably building in hidden concessions ($10,000 in upgrades, assistance in getting in the home, special financing through the builder's own mortgage company, etc). You cannot compete head-on against a builder but would have to discount your home against the builder's properties. In my market, I've seen a discount of 10-15% for a 1 year old home vs. a new home.

Roger Strahan, IFA

 

[xmuyb6rt]

Thanks for the great replies. They were very insightful.

Shaun

 

[Rich Hahn]

I cant explain it but these "distressed" sales in some hoods I frequent turn out to be the highest sales.

Try to explain the highest sale sold "as is" needing "TLC" while your subject has updating. No real upper bracket for these? Lie opps I mean explain away!

I think there is this TV generation, the Homedepot crowd who watch this old house or trading homes or whatever. They see this fix up property and they dont care what it costs as long as they can qualify. Because it needs work the buyers assume its priced under value. They cant wait to buy it and try all the new FAUX painting they see done every saturday afternoon, or landscaping tricks or decks etc.. Then there are the INFOmericals pumping fix and flips..same mentality 'needs work must be under priced'. All these get rich quick thinkers. Enter the school of hard knocks.

Price doesnt always equal value, or is it supply and demand(no).

Realtors dont know better or care, higher the sale higher the commission check.

**someone edited my post..wonder who**

 

[Mike Garrett RAA]

Da market is da market! To say liquidation or foreclosure sales are not part of it is like saying..."imported cars are not really cars because they are not Chevies or Cadillacs".

 

[David S. Roberson]

Shaun,

You're right, this sale should be examined very closely. This is an asset liquidation sale and usually involves a lower price due to shortened marketing period requirements. Sales like this in Tennessee are indicated on the Accept/Reject codes Tax Assessors use on the Data Cards. This would be classified as "WN" (non arm's-length transfer) or "WG" (forced sale); that would be the first red flag an appraiser should look for. It would be better to avoid this sale if other qualified sales were available. To use this sale would involve adjustments that are sometimes made arbitrarily, without adequate market data to support them. Better to steer clear of this sale IF there are others that can be used.

 

[Ed Potrafke]

Shaun,

How long was it on the market? If the home was in similar condition to the other sales, and had a reasonable marketing period, it may very well be a good sale. Not all lenders sell foreclosure properties for quick sale. Some lenders will market the home to recieve full value.

 

[Richard J. Glesser]

In using any sale as a comparable, appraisers are required to report any ownership transfers within the past year for all comparables. This search in addition to noting that the property was sold below normal market values, would "red flag" the sale to be researched and possibly set aside as a non-arm's-length transaction which is required by USPAP to be considered a viable sale. If many area homes are being foreclosed and sold "below market", then that would indicate a downward change in the market. I have found that lenders generally attempt to liquidate their real property as soon as possible - remember, there's no interest paid on real property ownership but there are costs involved. Based upon a good loan with a 20% equity position, a lender can sell a $100,000 property for about $90,000 and not take any lose, which, by the way, they can still go after the previous owner to collect.

No one wants to be the appraiser who overlooked a very good comparable, so it's common for appraisers to search the street for sales in a wide value range to be sure there's no "low sale next door" of an identiacl home which they overlooked but the reviewer found. If you're having your home appraised and have such a home very proximate, point it out to the appraiser telling them the sale circumstances so they'll know before they do their comp search. :usa:

 

[xmuyb6rt]

Thanks for the additional replies.

Here's what's available from the County Appraiser online:

The house was sold for $139,999 in Nov 1999 (instrument: Warranty Deed)

The house was sold for $100 in Nov 2001 (instrument: Certificate for Title)

The house was sold for $130,000 in Mar 2002 for $130,000 (instrument: Special Warranty Deed).

The home was assessed for $144,300 in 2002 (like most places, I suppose, the assessed values run lower than the market value in our county).

So the house sat vacant for about 15 months after they owners let the bank have it.

I'm at the very beginning of considering the long road to a career in appraisal, so I thought about this house on my street and how using it as a comparable for a given subject in this new subdivision might result in an inaccurate valuation.

It seems that the most common data sources for comparables are the local MLS's and the county appraiser offices. Are there others?

What data is generally available from a local MLS versus the county property appraiser?

Thanks,

Shaun