Distress Sales As Comps

[hal380]

Sometimes I think I have the right slant on things, and then I start to question myself.

I understand the defininition of value as used in RE Appraisal.. "Informed buyer and informed seller acting in own best interest without undue pressure etc etc....." (paraphrased)

I undestand that "distressed properties" by definition are properties being sold by owners who are under pressure, so I guess they should not be considered in selecting comparable sales.

HOWEVER I am sure in every market there are distressed properties for sale, and a prudent buyer would be alert to these opportunities to purchase below market. So according to the principal of substitution, shouldn't we consider these properties? Should they be reported as a 5th or 6th comp, but not weighted very much in arriving at a final opinion of value. (maybe I am answering my own question just by asking it)

The house I live in was on the market for $259,000 and had gone through 2 divorces, with the attendant deferred maintainence. I bought the house for $205,000 and put $30k into it and believe I could sell it in the current market for $275K+. This purchase by me, meant that I DID NOT BUY
another house in the $200K range.

Your thoughts please.

Regards

Hal

 

[Phil Rice]

I undestand that "distressed properties" by definition are properties being sold by owners who are under pressure, so I guess they should not be considered in selecting comparable sales.

There are distressed properties and there are distressed sellers, not the same thing. Just because the house is a mess does not mean that the seller is "distressed". They may just want to sell (as is) for the highest price they can get, ie typically motivated.

I would define a "distressed seller" as someone who is willing to accept a substantially lower price in exchange for a quick sale.

 

[hal380]

Hi Phil;

Excellent point, Thanks

Hal

 

[Mike Garrett RAA]

What is typical for your market? If those properties represent the market then use them. Read the certification for definition of market value.

If I had a dozen sales to choose from and two were distress sales and the lowest priced I most likely would not use them. My technique is to eliminate the extremes and work more toward the mean or mode. The exception is REO appraising...in that case I tend to consider all of the distress and foreclosure sales as well.

Ask yourself....as a typical buyer, motivated and not acting under duress, what would I do?

 

[Caterina Platt]

Thank you Phil!!

I was just having this discussion with another appraiser last week. I used the term 'distressed property condition', and no matter how I paraphrased, explained, etc., he had it stuck in his head that distressed applied only to the terms of sale, not the condition.

I agree with Mike in regards to extremes, norms, and using like situation comparables for REO's. Apples to apples.

 

[Restrain]

I had one the other day. Owner was being transferred to Georgia, selling home in a nice, restricted subdivision. Home sold for $350,000, left approximately $30K on the table as he was not getting any home relocation assistance and needed to sell the home quickly. As a result, the appraised value was significantly higher than the sales price.

When I suspect this, i.e., "motivated seller", I will verify the sale with the broker and either not use it or make it 5 or 6, commenting appropriately.

Roger