Why Appraisers Don’t Use Foreclosed Homes as Comparable Sales
Appraisers use home sales that were made as stand-alone transactions in which neither the buyer was desperate to buy nor the seller was desperate to sell as a basis for comparing other similar properties in an area and estimating fair market values. A foreclosed property does not meet these criteria due to the nature of the legal process the home is going through and the added incentive sellers have to find a buyer before time runs out.
Homes in foreclosure are generally classified as distressed properties, which means that there is something wrong with their physical or legal condition that causes owners to sell for less than the property’s fair market value. In some cases, this could mean a condemned home that the government ordered to repair or torn down, one that has been severely damaged by a natural disaster, or one that has fallen into disrepair as a result of the owner’s neglect of maintenance.
In such cases, buyers of a distressed home may offer sellers less than the property would sell for if it were in decent enough condition. But these types of houses are also difficult to compare with other houses in the geographic area that are in better condition or where the owners have no additional reason to part with the property.
Foreclosure cases work a little differently compared to a house that is falling apart or damaged, but the lack of time that many people have to sell before losing the house in a county sheriff sale indicates that buyers have the advantage in negotiating an advantageous price to complete the sale before eviction. The current owners may not really want to sell the home to stop foreclosure, but have run out of other options that would have allowed them to keep the property.
This is one of the reasons that foreclosed properties often sell for less than their fair market value or the current market value of similar properties, even if they don’t have any physical problems. Appraisers know that the sellers may not even have wanted to sell, which can easily distort comparable valuation data.
Properties owned by banks after a foreclosure auction has taken place are just a little different. In these types of cases, banks may not take care of houses that then quickly fall into disrepair, or vandals may strip them of any useful resources such as copper pipes and electrical wiring, for example. Banks also don’t want to own these properties, as they are a drag on the balance sheet and are often willing to take lower offers from real estate investors or buyers willing to fix up the properties.
But then again, these types of sales are not between a disinterested buyer and a disinterested seller; In most foreclosure cases, the seller is willing to part with the property for just enough to make it worthwhile to achieve their goal of avoiding foreclosure or unloading a nonprofit asset. Homeowners want to sell to save the home and their credit from foreclosure, while banks just want to offload foreclosed properties and get back to other lending activities.
Therefore, foreclosed properties are not good candidates for comparable sales used in appraisals, except possibly to compare the sales of other foreclosed homes. Appraisers would prefer to use home sales that were not completed under duress, because a certain home was condemned, sales between family members, or foreclosures. Values have too great a tendency to be distorted because one party to the transaction has more power and a better bargaining position than the other.
