Many of our readers ask us if appraisers use distressed properties (short sales and foreclosures) as comparables when doing an appraisal on non-distressed properties. We have posted on this issue on several occasions (examples: here and here). Last month, the Appraisal Institute issued 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.”
Bottom Line
Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be.