Using distressed sales as comps – some states say no…

In today’s RealtyTimes email is a story by Bob Hunt about several states passing or looking at passing laws that try to govern how appraisers might use (include or not include and how to factor) distressed sales – foreclosures and short sales. Click here to read the entire article.

The legislators in the states involved undoubtedly believe that they have the best interests of their citizen at heart – legislators, after all, always seem to think that they know what’s best for us. However, as Hunt points out in the article, these state laws may put the appraisers at odds with Federal laws which state that they must use all available sales in establishing the local market pricing. Hunt goes on to point out some of the complexities that appraisers already need to figure out in order to comply with the Federal guidelines under the Uniform Standards of Professional Appraisal Practice (USPAP), and how these new state rules would further complicate things.

Hunt uses the figures 30-40% of all sales as his measure of what percentage of all sales involve distressed properties. In my area that is still running well about 50% and reaches as high as 70% in some markets. It would be almost impossible to find enough comps to do an analysis without using distressed properties in my markets. The challenge for Realtors® and appraisers alike is figuring out how to factor in the impact of neglect or intentional damage to these distressed houses when using them as comps.

One might make the argument that even if one is diligent in not using distressed homes as comps they still have a large impact on value, since they are now heavily influencing assessments in most areas, causing home values to continue to drop. It is also somewhat ingenuous to think that these homes are not a major part of any local market, especially in my area where they make up such a large portion of the actual sales. I have seen figures that show that they make up less than 25% of the overall inventory on the market in my area and yet they constitute 50-70% of the actual sales in 8 out f the 9 markets that I track.

When I’m doing CMA’s for local clients I try to take out the most egregious examples of distressed homes – those maybe selling for $40-50/Sq Ft in a neighborhood that averages $90-100/Sq Ft. Those are usually the homes that have been trashed or stripped by angry ex-owners and should not be included. I trend to leave short sales in the analysis and foreclosed homes that look like they brought reasonable prices. Those are arbitrary calls on my part, but then the whole home valuation process is much more arbitrary these days that in “normal times”, whatever that was.