Is a property worth less if it’s a short sale?

No. A property is worth what it is worth regardless of being distressed or not. With that being said, when a house is a short sale it may need to be marketed at a more aggressive price level to dump the property before a foreclosure date or offset any negative perception in the market for being a short sale. Notice though we’re talking about an aggressive “price” and not “value”.

Here’s a good question to ask. If a short sale was not a short sale, would it sell for more? The answer is very often “yes” and that leads us to a better picture of what market value is. The truth is that properties are frequently marketed as short sales and end up generating little interest before resulting in foreclosure. But then after these same houses end up as bank-owned they generate very quick offers at or above the original short sale listing price. Of course part of this could be banks not cooperating with the short sale process and buyers tiring of waiting for months for the deal to close, but it’s hard to ignore that short sales often (not always) sell at lower levels.

Case-in-point: I appraised a house recently in the City of Galt where competitive properties in the neighborhood showed a distinct difference between short sales and everything else. Comparable non-distressed properties were selling around $105,000-$115,000, REOs were selling mostly between $85,000-$100,000 and short sales were selling closer to $85,000-$90,000 near the bottom of the competitive range. It’s certainly true that condition and quality of updates played a role in the price differences, but it’s not an accident either that short sales were consistently finding their place near the bottom of the market.

Why is this important to understand?

  1. Appraisers:  From the appraisal standpoint, if short sale comps are used in an appraisal report (without an adjustment upward), then the value in the report may be lower than what it should be. The value could really be a “quick sale” value rather than “market value”. That’s not good on many levels. Please understand though that short sales do not always sell less than fair market value, so an adjustment upward is not always warranted in an appraisal. It all depends on what is happening in the market.
  2. Investors:  I just spoke with a Sacramento investor yesterday who has been growing frustrated to see some of his properties compared to bottom-of-the-market short sales by appraisers. This investor found me online and he called me to see if I had any advice on how to deal with his situation. That’ll be a different blog post, but I did give him some tips, a few which I mention below.
  3. Real Estate Agents:  I recommend real estate agents (and investors) provide a detailed list of all updates to appraisers (with costs if possible). Send this via email or provide in person to the appraiser. You can also discuss any relevant marketing information (ie.. “There were 4 full-price offers in 3 days and I am still getting calls and back-up offers”). Lastly, feel free to share market research and properties that helped you establish your listing price. Don’t tell the appraiser which comps to use and how to do his job, but rather share data that helped you establish your price so the appraiser might understand your point of view. You are allowed to talk with appraisers about property specifics and the real estate market, but don’t coerce and pressure for a certain value.
  4. Sellers:  Know your market if you are selling. You will have to compete with distressed properties around you, which can impact your price, but that doesn’t necessarily mean you have to price your property the same as neighborhood short sales and REOs. A trusted real estate agent or pre-listing appraisal should be able to give you guidance to understand the market. Misunderstanding what the market is doing can cost you dearly.

What do you think? Agree? Disagree? Any stories to share?

If you have any questions, or real estate appraisal or property tax appeal needs in the Greater Sacramento Region, contact Lundquist Appraisal by phone 916-595-3735, email, Facebook or subscribe to posts by email.

Comments

  1. says

    Hi Ryan, I saw this post on Google + yesterday, saw this it was written in 2011 and wondered how the answer may be different in 2014?

    Your explanation and tips for RE Agents are excellent. It would have been awesome for Agents to take the time to provide a list of updates in their listings to help the Appraisers understand a property.

    Inventory to sell is a common issue for Agents and home buyers now nationally and Teresa Boardman, with St Paul MN Real Estate Blog, commented on Google + yesterday that there’s only 3.4 months of inventory in February 2014 when the market really isn’t into the Spring buying selling season. She stated, “It would be nice to have some more homes to sell.”. I’m seeing short sale homes in nicer condition and selling for more in 2014 than during market condition. Of course, those in inferior condition as selling at some discount, but not as much as during the meltdown. And, in some markets or popular zip codes, local Appraisers have begun once again to apply increasing Time Adjustments due to buyers trying to buy less supply. For short sales, as with most housing situations, market conditions dictate.

    • says

      Thanks Bill. I always appreciate your commentary. The market here has definitely changed since the time I wrote this post. At the time the market was declining in value and short sales were increasing. In fact, short sales hit their peak at 35% of all sales in Sacramento County in Q1 2012. Now they are only about 10% of the market. Inventory disappeared, so short sales all of the sudden became much more attractive to everyone – even investors. Yet despite inventory going down and the market seeing a dramatic increase in value in Sacramento, short sales have tended to still sell for the lowest amounts. Of course at the same time many foreclosures have sold at higher levels because the banks are pricing them higher and cleaning them up a bit before putting them on the market (this is not something they did in 2008).

      Sometimes I hear appraisers say they only use short sale or foreclosure sales as comps when appraising a short sale. That is fine as long as the client is looking for a distressed value. If they are looking for market value, then it’s not a good idea to choose the lowest sales in the market for the appraisal report. That is not market value, but a quick sale value.

  2. says

    Thanks so much for this insight, Ryan. Yes, short sales generally sell below market but now less below market than in 2011.

    I’ve been receiving much more push back from Lenders and AMCs this year when I use distressed sales as comps in REO appraisals. However, I show them in my reports in 1004MC that distressed sales made up like 53% of all sales in that neighborhood in past year, which warrants my being able to use 3 non-distressed and 2 distressed comps in my report. The perception is that all markets are doing better and in Baton Rouge, not all neighborhoods are enjoying good times, not yet anyway.

    Ryan, always appreciate your insight and how your delving into the numbers reveals interesting trends. The Numbers Don’t Lie and they help correct our sometimes misconceptions in a market.

    • says

      Well said, Bill. There are sub-markets within the market that really might not reflect the overall trends. 53% is still really high. Wow! I haven’t seen numbers like that for quite some time in my area. We dipped down to about 5% of all sales as foreclosures in Sacramento County. It used to be 73% of all sales were foreclosures in Q1 2009, but now it’s been closer to 5%. On a practical note this means I have done very little REO work lately, whereas I had heaps of it years ago.

Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *


*