Like Kary said, ... If an appraiser is appraising a house, they are required by USPAP (Uniform Standards of Professional Appraisal Practice) to ignore distressed sales ...a sale that occurred under distressed situations, ... like divorce forcing a quick sale, foreclosure/short sale.

However, if I was working for a buyer, you do have to consider that short sale in the bigger pictures. We as agents aren't held to any USPAP rules in terms of pricing, so we're more free to consider the situation. The way I see it is...if you're looking at a particular neighborhood, and there are several homes for sale and the only one or one of the very few homes that have sold happened to be a short sale, ..that says a lot about the local market. You could deduce that the short sale price may be the true market value of that area. Also would need to consider how long it took the short sale to get an offer (something that might be difficult to do with only consumer real estate sites)...that could tell you another bit of info. If the short sale still took a while to get an offer, ...and most or all of the other homes in the area are still up for sale... i'd say the short sale is the only valid comp for that area. So...long answer...it depends on the unique situation that very local area is experiencing.

If foreclosure auction sales and REO sales are affecting the OVERALL single family housing market, then the non-distressed, arms-length sales should be reflecting that in their sale prices. Let the market values (not liquidation values) speak for themselves! Revisit the type and definition of value requested by the client. Is it Market Value or something less than market value?

If the majority of sales in a particular market are occurring at liquidation value and have impacted the overall market, the potential exists to force owners of other fair market listings to lower their prices to compete or take their listing off the market entirely. In this case, the overall market value could eventually reflect a liquidation value.

LOL...So true Kary. In many areas here in Michigan, if there aren't bank or short sale comps, there's nothing. I have 2 offices, one in Michigan and one in Tennessee, so I get to see 2 very different markets. I think we've all agreed that in proper evaluation of a complete market in any area, "all sales" need to be included in the initial research. And based on the impact and current status of the market, be it fair market, or a distressed market, helps to determine what weight or consideration the distressed sales should be given and whether or not they should be utilized or considered as a comp. It also has a lot to do as to what the purpose of your question (Victor) is as well. What exactly are you looking for comps for? Buying? Selling? Investment? Litigation? Tax?... As you can see, the list can go on.

I'm glad to see an appraiser finally answered, but I'd note that the appraiser is from Michigan, which has one of the worst housing markets around. If it wasn't for short sales and foreclosures, they probably wouldn't have any comps. ;-)

As to the comment about some short sale generating multiple offers, the NWMLS is starting to crack down on listings where the asking price is intentionally set lower than a reallistic number the bank would accept. So that might be coming to an end.

What do you mean "count as a comp?" Count for you? To the lender? To the seller's lender? A 3rd party appraiser?

Sure counts for me as a buyer, lol. Same reasons why I'd refund clothes from Nordstrom if I can find the same thing at the rack for half price

Victor,
I would not assume, as James appears to, that a short sale is necessarily a fire sale. Very often short sale properties get multiple offers with escalators that drive the price higher than the asking price. If the short sale is within the price range of other comps in the area, I think it has to be considered. If the asking price is way off and you don't have a sold price yet, then I would not consider it.

From the phrasing of your question I assume you had one comp that was a short sale. If you have the sold price and the property is truly "comparable" then the question becomes, does the sold price reflect the same range as the other comps you have? This is what I meant to communicate when I said "all other factors being equal."

Hello Victor. I am a Certified Residential Appraiser. Yes, short sales and Bank sales should always be researched and given consideration on what their impact are on an area. Whether it is the driving force or predominant market helps determine how much weight or consideration should be given to those sales. In the current market, it is very typical to utilize a short sale or bank sale in a report. Many lenders currently want to know, specifically what the impact of distressed sales are to both the sales and active listings in the area. And let's face it, there are many homes that go into short sale/3rd party approval in today's market, or are bank owned that are in move-in-condition. Would the typical buyer pay full market price for a home, when just down the street another is offered for less and in the same condition? Granted, this is not always the situation, and in some areas you may not need to utilize or consider bank sales because there are fair market sales driving the market instead. However, it is a very dangerous area to just overlook and not consider a short sale just because of it being a short sale. In order to reflect a true and accurate market, at times short sales will be included in particular to reflect the lower market of an area. They can also be used as indicators as to what is occurring in the market. I hope this helps.

I think as “experts” in the market we had better know about what short sales are doing. I agree that they are not “arms length transactions” and see why some agents might not include them in their analysis. However I think it’s very naive to think that shot sales are not effecting the market value of all our homes in King county. There are certainly some buyers that will keep away from short sales, either because of horror stories, hassle, timing, or even agents pushing them in another directions. There are also a lot of buyers that are looking at short sales and looking to find that “hot deal.” This has an impact on current sellers. When pricing a home I feel it’s a mistake not to see the impact of short sales on the current market value. Also when pricing a home it’s imperative to look at four categories of homes: 1) Sold homes. This is the most obvious. As a general rule the best comps are sold within the last 6 months and within a mile. Note this is a general rule and may not apply to specific homes/situations. Some examples can be view homes, homes on acreage, waterfront homes, etc. 2) Current competition. Looking at other homes in the area, again generally within a mile, to see how you stack up to the other homes on the market. Why buy your home if they can get something so much better for the same price? 3) Expired or Cancelled homes. Being able to assess what didn’t sell and what they were priced at is another piece of the larger picture when pricing your home to sell. 4) Pending Sales. This is one of the best indications of what your home may be worth. As agents we won’t know what the sales price is but what we do know is that at the current list price the home solicited an offer that was acceptable to the buyer. Most homes still sell in 30 days after accepting an offer so this makes it very current information. I would also suggest that you look at days on market for each and every one of these categories. To not include short sales in this evaluation limits the information and the total picture of what is going on in the real estate market. Homes are not sold in bubbles… but in the community. Short sales are a reality right now and they are having a huge impact on price.

I have to agree with James on this. There may be many ways to answer this but when researching comps I personally treat short sales as I do every other possible comp--It depends on what the purpose of my research is. If I'm doing a very narrow, specialized look at comps for a specific property, I would not include it unless my subject is also a short sale. For a wider spectrum market analysis, it really depends on what other comps you have to work with. If you have enough non-short sale comps, you don't need to use it.

But, as mentioned below, a single short sale does not constitute a true representation of a particular market area (except for instances when it does, lol).

Another way to look at this is let's say you're planning to sell your house. Your neighbors have the same house plan you do with similar upgrades and view. They're getting a divorce and are selling their house for $100,000, though they paid $300,000 and it's worth approximately $500,000. I would not consider this a comp because the price is artificially low and should not have any bearing on the market value of surrounding properties. Now let's pretend this is a short sale. Same answer.

If a majority of houses in this area are being sold for $100,000 by people getting divorces, then you will most likely not be able to sell yours for $500,000. This definately does affect your market value. But one house probably won't.

Karen, under your methodology, a house in the area that was a fire sale would have to be counted. I know for sure that an appraiser will not count that house in their comps and appraisal for the bank. For a buyer and their agent to base their offer price on a fire-sale is not accurate and simply sets an unreasonable expectation for the buyer.

I just emailed an appraisal school instructor and see what he says.

Victor,

A short sale would have to be factored into the comparables, because it is a sale in the area. An expereinced, knowledgeable agent can do a detailed report and statistical analysis, which would include all the comparables in the area. You have to look at Active, Pending and Closed Sales to determine your best pricing strategy. The short sale is one of the comparables.

A key factor in in determining how aggressively to price is the current absorption rate for your neighborhood. On my website, http://www.mcknightrealty.com, under the button "Market Statistics', I do have a link to graphs that show the current absorption rate. When absorption is low, you have to price very aggressively to sell.

I notice you are also planning to buy. If you are planning to move to a larger home or a more expensive area, today's market is the best we may see in this century. Because if prices have dropped 10% (to use round numbers), that means a $30,000 drop on a $300,000 property and a $60,000 drop on a $600,000 property. This is the very best time to "move up".

I can't see that the trend thing would make sense at all. Again, being a short sale cuts off 75% or more of your market because most buyers don't want to deal with the timing issues and uncertainties that a short sale entails.

Short sales would be useful if you were trying to price a short sale as an agent, because then you'd be going after the same market. But the appraisal for the financing should still be based on non-distressed sales.

That said, if you have an area with a lot of short sales or foreclosures, that will drive down the prices of the other properties. But you would still look at the prices those other properties are selling for in such a market.

it only counts as a comp if short sales or reo's are th driving force in the market or if you are trying to get a value on another reo property for short sale, otherwise you would not usually use that comp.

any appraisers?... anyone? I had taken a commercial valuation class and half the class were appraisers and the topic came up and it sounded pretty clear that a distressed sale (and it was the job of the appraiser to try and figure out if a sale was distressed or not) is not considered a market sale and under USPAP cannot be counted. ...but the trend thing could make sense...but at the same time...it's a little ambiguous ... and to my understanding... ambiguity is one thing appraisers don't subscribe to.

any appraisers?

Hopefully an appraiser will respond. I have been told as I mentioned below if short sales and foreclosure are part of a trend they can be considered. One short sale in a neighborhood would not constitute a trend.

I'd really like to see an appraiser answer this question, because I find it very hard to believe that they'd ever consider a short sale. The definition of comparable sale/market value includes limiting factors like not being affected by undue stimulus, buyer and seller typically motivated, sales price unaffected by sales concessions allowed by anyone involved, etc. Each of those would seem to exclude short sales. You cannot just dollar adjust for such factors where the condition results in losing over 75% of your potential buyers, as is the case with short sales.

I also wonder how many answering here have been expert witnesses. I've only been an expert witness twice, but the last time the court through out all of the appraisers comps as comps. One was a HUD property, one indicated "motivated seller" in the listing. Others were simply too far away.

An appraiser can account for short sales and foreclosures if they see a trend. In that situation a shortsale and foreclosures our both considered in an appraisal. The appraiser makes monetary adjustments that account for the shortsale or foreclosure.

If you mean by an appraiser, I would say no. It's a distressed situation, not a normal sale situation.

Here in Florida law has been enacted to reflect the full actual selling price when paying the documentary stamps on the deed. In effect, the stamp amount tax equals the selling price + the amount "foregiven" by the lender. In this case, the short sale could be used as a comparable.

Victor,
When talking with clients I have to remind them that a 'short sale' doesn't always mean a good listing price. I would have to argue that like estate sales and some other seller specific issues, a 'short sale' is not exactly executed at 'arms length'. That means it's not truly a normal market sale. I've been involved with such situations where the delay of a non-responsive institution sent potential buyers packing. It also seems to invite people to low ball since the loss is sustained by an institution with deep pockets. I suppose at some point if short sales were the norm of local market conditions and not a small fraction of sales like today then there may be no way to ignore their relevancy. Let's hope we don't get there.
Steve

All other factors being equal, I can't imagine why a short sale would not be used as a comp.

While there are many variables to consider, in my local market, the lender will not usually approve a short sale unless they feel confident it was marketed for a reasonable time period, and sold at or near market value. The condition of the property and other extenuating factors will play into the valuation. Unless it is significantly outside the price range of the other comps, I would include the short sale when analyzing the comps.

Depends on what you are buying and where you are buying.