Would you support a bill in congress that outlawed appraisers from using distressed sales as comps? On paper this might sound appealing because there is often a difference between market value and distressed sales, and if the wrong comps are used there could be a negative impact to value. But in reality, sometimes there are nothing but distressed sales for the appraiser to use.
There have been quite a few bills over the past few years proposing appraisers not be allowed to use distressed sales in their apprisal reports. As an example, H.R. 1755 was introduced in the House of Representatives on May 5, 2011 and says:
ARMS LENGTH TRANSACTIONS: The appropriate Federal banking agency shall require that entities used by financial institutions to assess or review underwriting standards and collateral values for real estate loans made by such institutions after the date of the enactment of this Act use comparable sales involving arms length transactions to make such an assessment or review.
(A) IN GENERAL- The term `arms length transaction’ means a negotiated real estate transaction between a buyer and seller in which such buyer and seller act independently of each other.
(B) TRANSACTIONS EXCLUDED- Such term shall not include any transaction involving a short sale or foreclosed property or any other distressed real property.
Can Congress Provide me Comps? I’m finishing up an appraisal on my desk right now in the Wild Wings neighborhood in Woodland. This neighborhood is unique and there are literally no other subdivisions in Woodland that compare to this secluded golf course community. Therefore the most adequate and competitive sales come from within the neighborhood (that makes sense, right?). The only problem is that 75% of all sales over the past 12 months were distressed (only 32 sales by the way). Moreover, I’m doing an appraisal of a 2,500 square foot house and 8 of 8 sales between 2300-2800 squafe feet over the past year were either REOs or Short Sales.
If a law was passed that stated appraisers could not use distressed sales, I would have a big problem in this neighborhood and many others like it. Thankfully I know how to do my job though and I can use sales like this and sift through which ones may or may not represent market value (and make adjustments if appropriate).
Would you support this bill? Why or why not? What is the motivating factor behind a bill like this?