"Will Short-Sales and Foreclosures Affect My Appraisal?"

[Marco Ruiz]

I often get asked, "Will short sales and foreclosures affect my appraisal?" The answer is a definite, "It depends." It depends if short sales, REO's, foreclosures, and pre-foreclosures, etc., (I'll collectively refer to these types of sales as "distressed sales") are a factor in your market. That is, if they are affecting the value of properties that would compete with yours for a buyer.

For example, I recently appraised a town home where 15 comparable properties had sold in the past year and five of them were distressed sales. Now, that fact in and of itself may not mean that distressed sales are a factor affecting the current market value of the subject, but all five were the most recent sales that had closed in the past 90 days. In other words, you would have to go back over 90 days to find a sale that was not a bank-owned property or pre-forclosure short sale. Furthermore, there also happened to be 15 comparable properties currently listed, and seven of them were distressed sales. The list prices of the distressed sales were, on average, 18% less than the list prices of the non-distressed sales. With that much difference in price, the chances are good that the distressed properties will attract buyers before the non-distressed properties.

This is clearly a case where distressed sales are affecting property values in this particular market segment. Anybody wishing to sell a town home at this time and in this market will have to compete with these lower-priced properties. In theory, after the distressed properties are bought up, property values will increase. This could be as short a period as a few months to a year. I say "in theory," though, because other factors may come into play to keep property values depressed. These may include such things as more distressed properties coming onto the market and/or a decrease in the purchasing power of the typical buyer due to such things as rising unemployment and higher interest rates.