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Why Foreclosed Homes are Not Used in Appraisals
By: Nick Adama
Appraisers use sales of homes that were made as arms-length transactions where neither the buyer was desperate to buy nor the seller was desperate to sell as a basis for comparing other similar properties in an area and estimating fair market values. A foreclosure property does not meet these criteria because of the nature of the legal process that the house is undergoing and the extra inducement that sellers have to find a buyer before they run out of time.
Houses in foreclosure are typically classified as distressed properties, which means that there is something wrong with their physical or legal condition that induces the owners to sell for less than the fair market value of the property. In some cases, this might mean a condemned house that the government has ordered repaired or taken down, one that has been severely damaged by a natural disaster, or one that has fallen into disrepair as a result of homeowner neglect in upkeep.
In such cases, the buyers of a distressed house are able to offer the sellers less than what the property would sell for if it was in a fairly decent condition. But these types of houses are also difficult to compare to other houses in the geographic area that are in better condition or where the owners have no added reasons to unload the property.
Foreclosure cases work slightly different compared to a house that is falling apart or damaged, but the lack of time many people have to sell before losing the home to a county sheriff sale indicates that the buyers have the upper hand in negotiating a beneficial price in order to complete the sale before the eviction. The current owners may not really want to sell the house to stop foreclosure, but have run out of other options that would have allowed them to keep the property.
This is one reason that properties in foreclosure often sell for less than their fair market value or the current market value of similar properties, even if there is nothing physically wrong with them. Appraisers know that the sellers may not even have wanted to sell, which can easily skew comparable valuation data.
Properties owned by banks after a foreclosure auction has taken place are only a little different. In these types of cases, banks may not take care of the houses which then fall into disrepair quickly, or vandals may strip them for any useful resources like copper pipes and electrical wiring, for instance. Banks also do not want to own these properties as they are a drag on the balance sheet and are often willing to entertain lower offers from real estate investors or buyers willing to fix up the properties.
But again, these types of sales are not between a disinterested buyer and a disinterested seller -- in most instances of foreclosure, the seller is willing to unload the property for just enough to make it worth their while and attain their goal of either avoiding foreclosure or unloading an asset that generates no profits. Owners want to sell to save the house and their credit from foreclosure, while banks just want to unload foreclosure properties from their balance sheets and get back to other lending activities.
Thus, foreclosure properties are not good candidates for comparable sales used in appraisals, except for possibly comparing sales of other foreclosed homes. Appraisers would much rather use home sales that were not completed under duress, because a certain home was condemned, sales between family members, or foreclosures. The values have too great a tendency to become distorted as one party to the transaction has more power and a better negotiating position than the other.
Article Source: http://www.ezarticles.info
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