Appraisal Blog

How do Foreclosures Affect My Home Value?
March 24th, 2011 9:02 AM

Ever heard of the saying "One bad apple spoils the bunch"? Well that is not the case with home sales - the bad apple in this case meaning a foreclosed home that has sold under typical market values. Home appraisals are not just based on 1 sale in your area. In fact, all of the home sales in the area are considered to take in the BIG PICTURE of your particular market area. Certain questions should be answered - What is the typical sale price for the area, what is the typical size / age / design of the homes, how many are currently listed, how many have sold in the last 6 months and has the number of home sales decreased or increased in relation to listings. These are just some of the general questions that should be answered. Another big question is - How many of the home sales are foreclosed properties in relation to non-foreclosed properties. I have seen market areas with 90% REO sale activity - now that is a lot of "bad apples". If your market is having increased number of foreclosed sales, then there is a greater possibility that the market values start to become DEFINED by foreclosure sales. When this starts to happen, the appraiser MUST take this into account when determining the opinion of value.

I did an appraisal on a home a few weeks ago where every single home sale that was comparable to the subject in that market in the last 12 months were foreclosure homes. Although there were non-foreclosed homes LISTED for sale, all of the sales were foreclosed. The non-foreclosed homes weren't selling. I had to use all foreclosed properties to value that home. Why? Because those properties have defined the market. As a result, I had to utilize those sales to form my opinion of value, which came in under the sales price. Suffice it to say, the seller, buyer, real estate agents, and mortgage broker wanted my head on a plate. I just killed the deal.  I shouldn't be allowed to do appraisals in the state, the whole country, and even on the planet earth.

But after all the persecution I have to endure,  I will tell you one thing - the LENDERS, who are my clients, LIKE the appraisals I complete. How do I know this? They keep giving me assignments. Plain and simple. After all, they are the ones lending the big bucks. Many of them were the big losers when the bottom fell out of the market a few years back. They now have a huge inventory of homes that they can't get off of their books, many due to inflated appraised values by appraiser that "cherry picked" the highest sales to arrive at an unrealistiic value. These days, more and more lenders are interested in REAL numbers, not IMAGINARY numbers.

Don't get me wrong, I am not an advocate for the value that my client may or may not want, but I am an advocate for my appraisal and my opinion of value which is based on market data. And that, my friends is what EVERY appraiser should have in their best interest. If there is a client that doesn't respect that - Drop them. Sooner or later, they will join the other IMAGINARY numbers of defunct financial institutions in the industry. 

The days of cherry picking sales are over (or at least I hope it is), and lenders are now asking for statistical data as well as the traditional "3 comps". I try to use 4 or 5 comparable sale in my reports as well as 2 listings. Also, more narrative about market trends are also required in the report. 

So, if you are unfotunate enough to be in a market with a large number of bad apples, my heart goes out to you. But remember not to shoot the messenger, for that is in part what an appraiser is.

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Posted by Gerry Sauceda on March 24th, 2011 9:02 AMPost a Comment

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