Distress sales used as comps: Right or wrong?
Should residential appraisals use distress sales as comparables? It’s a thorny question and some state governments are weighing in on the issue.
A Realty Times article notes that using distress sales as comparables in a normal market is often considered inappropriate because such sales are unusual and do not represent the standard market. However, nowadays in many markets, distress sales may comprise 30 percent to 40 percent of current sales activity and are impossible to ignore.
Four states are considering laws that would affect how appraisers should consider the sale of distressed properties. Here’s a breakdown of legislation those states are considering:
• Illinois: A proposed law says that an appraiser may not “use as a comparable sale the sale price for a residential property that was sold at a judicial sale at any time within 12 months after the date of the judicial sale…” The Illinois law would sunset after five years.
• Missouri: Legislation says that appraisers must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), but not in cases when a property has been foreclosed. “An appraiser shall not utilize the foreclosure price as a comparable property when developing an appraisal,” the legislation says.
• Maryland: A proposed law is somewhat vague, but it says in cases of duress or unusual circumstances “such as a foreclosure sale or short sale,” the appraiser is to “consider” the property’s history (e.g. whether it’s being sold at auction or as a short sale) and “consider” the seller’s motivation, such as if the homeowner was trying to avoid foreclosure.
• Nevada: A pending law covers both short sales and foreclosures: “Except as otherwise required by federal law or regulation, an appraiser shall not include as a comparable sale in an appraisal a short sale or a sale of property which was the subject of a foreclosure sale.”
Appraisers are required to comply with the Uniform Standards of Professional Appraisal Practice guidelines for weighing comparables in federal transactions, which “mandates that appraisers must analyze such comparable sales as are available. Further, the standard cannot be voided by a state or local government.”
That said, a recent article at Appraiser News Online raises the issue that appraisers have a difficult decision to make when their state has different regulations than USPAP when it comes to weighing distressed sales.
Source: “Should distress sales be used as comparables?” Realty Times (April 5, 2011)