Appraisals & Distressed Sales

It’s quite often that a borrower reviews an appraisal that I send to them and they can’t understand why there are short sales and foreclosures included in it.  If there is a recent sales close (same neighborhood or within .5 miles) to the property and within the last 3 months it needs to be included.  A lot of times the appraiser will comment that it was a distressed sale and due to the condition little weight has been giving to it but it has to be included.

Here in Fort Lauderdale and all of South Florida we see this all of the time because there are so many distressed sales.  The article below, “Do Appraisers Use Distressed Sales As Comparables,” give very good examples to answer this question:

Last month, the Appraisal Instituteissued a paper on the subject. In the paper,  the Institute explained that:

“Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces.”

On whether an appraiser should use distressed properties as comparables, the Institute was very direct (all items in bold were shown as bold in the original paper):

“An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.”

And they explained the possible differences between short sales and foreclosures:

“A short sale … might have involved atypical seller motivations and so might not be an ideal comp…

A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”