We often hear how foreclosures sell for less than traditional sales, but let me show you some actual data to back this up. Let’s take a look all single family sales in the 95758 zip code in Elk Grove. What do you see?
The difference in price per square foot between traditional sales and distressed sales is striking. Generally speaking, the price tier in this market begins with short sales at the bottom, foreclosures just above the bottom and then traditional sales at the top. If you want to sound smart, you can explain this market segmentation by using the word “bifurcation.” Ultimately, since investors are gobbling up the market right now, many traditional sales have been spruced-up or upgraded, which means there can be an understandably huge price difference between these sales and distressed sales. However, even without the difference in condition, distressed sales often sell for less because they tend to be marketed more aggressively since banks must unload their distressed inventory (as opposed to an owner who can take more time to sell a property).
Will appraisers make a huge adjustment for distressed sales? All things considered, it looks like the most recent percentage difference between regular sales and distressed sales in this zip code is 15%. Ideally appraisers will not use foreclosures as comps, but that’s not always a luxury in today’s market. Despite foreclosure rates declining in recent months, there is still a hefty supply of distressed inventory. If an appraiser does use a distressed sale in an appraisal report though, this doesn’t necessarily mean there will be a 15% difference warranting a 15% adjustment. Why? Because part of the 15% difference could definitely include a price premium for condition and level of upgrades – not to mention other factors. Besides, what if new construction in a zip code boosted the overall price per square foot figures for traditional sales? This is why appraisers really need to understand the market and each individual sale rather than rely on general trends that may or may not be representative of the immediate neighborhood. In short, the data above shows a big price difference, which we should take into consideration, but we also must dig deeper into the rest of the market and competitive sales to really uncover what’s going on.
Does it seem most appraisers consider whether there is difference in price between foreclosures and regular sales? Any stories to share?
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I have made adjustments for REO sale and Short Sales using data pulled directly from the subject’s immediate neighborhood using only comparable data.
When I do this, I do include the supporting data and a hefty amount of commentary in the report.
In most cases, it has helped to explain why two ‘similar’ sales have a 15% difference in value.
In my experience, even with lending work, as long as you provide a logical explanation and supporting data, anything to help explain the ‘bifurcation’:) is welcomed.
Thanks for the post Ryan!
Good for you. That’s exactly what I do. I appraised a house very recently for 10% higher than model match listings on the same street. Why? Because the model matches were short sales and clearly not indicative of the market due to their aggressive pricing. We’re experiencing a bit of an uptick in Sacramento, but short sales are still not usually on the same level as traditional sales. I wouldn’t say they’re 10-15% different though all the time. If only there was a constant…
This is a good way to compare all those sales. It is very essential to know about these things.