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Distress Sales As Comps

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hal380

Senior Member
Joined
Apr 26, 2003
Professional Status
Certified General Appraiser
State
Connecticut
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

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
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

Senior Member
Joined
Apr 26, 2003
Professional Status
Certified General Appraiser
State
Connecticut
Hi Phil;

Excellent point, Thanks

Hal
 

Mike Garrett RAA

Elite Member
Gold Supporting Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
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

Senior Member
Joined
Jan 17, 2002
Professional Status
Certified Residential Appraiser
State
New Mexico
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

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
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
 
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