"Market value results when the parties are typically motivated, are generally well informed, and are acting in their best interest"
If they are not typically motivated, or if they are not well informed, or if they were not acting in their best interest, then the sale ceases to reflect the conditions of market value.
When the above is true, sale conditions that do not reflect MV terms can be adjusted to the MV presumed sale terms for subject. OR they are not well informed Or not acting in their own best interset, there is a double standard with the "REO are not good comps " crowd. Appraisers are quick to exclude an REO as a comp for not reflecting MV conditions, but have no problem using an over market flip sale, or builder sale, or a multi bid high sale of a home. Do you think a buyer caught up in a bidding war who overpays by 20k just to beat out another buyer, is acting prudently and in their own best interest? Are they well informed of the consequences (over paying) of "winning" a bidding war? Where is the adjustment for that condition of sale?
The "winner" of the bid war who over pays is likely to default later if they can't sell for what bought the house for, creating yet another REO property. REO properties have a history, and the history starts with the owner over paying at some point, (or over borrowing, in the case of a target high $ refi ),
Appraisers need to recognize the fact that high prices that spiral away from real income to support the mortgage payments, are the first step in a later chain of events that often lead to defaults. These appraisers need to recognize the history of the REO and short sale properties in their market areas. Their knee jerk answer often is, " REO's are there not becuase the buyer overpaid, but because the market declined!" Well, why did the market decline? Because home prices went so ustainably high, that there was nobody left to pay more for them. The owner's could not sell them for even the mortgage amount. REO's and short sales are related to buyers or owners over borrowering for property. When the "winner" of a bid war puts 10% down on the highest price bid, they are over borrowing....doubtful they'd pay 20k more to beat out the other guy, if the 20k had to be paid in cash.