Ed note: I’m very please to welcome Karen Pape to RealCentralVA again. She wrote in October about (then) new appraisal issues facing Realtors.
The real estate market is becoming more and more segmented and unpredictable, and appraisers are going batty right now trying to draw meaningful conclusions from very scarce data. One can categorize the residential real estate market into the following three segments. First, there are those doing well, with “well” being a relative term. This includes property worth at least (ouch!) what it was worth in 2007.
The second category includes most area properties. These have declined slightly, up to about 15% (double ouch!) in the last two years. Historically, this would be considered a large drop in value, but not today. People should assume that their property has declined somewhat in value since 2006.
The third category includes those properties with “significant” decline or free fall, and yes, they do exist in this market. These would be neighborhoods where most of the sales are foreclosures. In our market, these are generally confined to outlying geographic areas.
Lots of Realtors want to know why appraisers are using foreclosures or short sales in their appraisals. There are valid reasons for using them in specific circumstances. We use the following guidelines in deciding if a foreclosure sale is appropriate.
First, if there is a foreclosure or short sale in the neighborhood that appears to have sold for market value, i.e. it is in line with other normal sales in the neighborhood, we may use it for additional support. Surprisingly, this may indicate a pretty strong neighborhood if the only foreclosure in a neighborhood with several sales sold at a price that doesn’t appear to be a discount from the other sales. This may indicate that the lender didn’t have to negotiate too hard because there was ample demand for these properties at market value.
Second, there may be instances where a lender may be looking for two values – both “market value” and “liquidation value.” Foreclosures and short sales are usually the best indicators of “liquidation value.” The underwriter may ask for this second value if the property is quite unique or the borrower has credit issues, or for reasons unbeknownst to the appraiser. In this instance, the appraiser is likely to be asked to provide two values based on different sets of comparables.
The third reason we would use foreclosures would be in neighborhoods where they are abundant enough to create or influence price. Common sense dictates that if a house is in a neighborhood where most of the listings are foreclosures, a smart purchaser is not going to pay the homeowner more than he could pay the bank for a similar property. So, a good rule of thumb is that if foreclosure activity becomes the market in a neighborhood, those sales should be used by the appraiser.
A final reason that foreclosure sales are used is, in my opinion, not necessarily a valid reason. I have heard of situations where an overzealous underwriter requires sales of foreclosures, probably because he saw that some appraiser in Arizona or California used them. The underwriter may insist that foreclosures bear merit. The appraiser has to decide on the best course of action. She can either capitulate and provide the sales, or she can enter into an angry standoff with the underwriter.
Either way, she’ll be stopping at the store on the way home to further enrich Novartis Corporation. I hear they make Maalox.