Distressed Properties Affecting Appraisals

Distressed Properties Affecting Appraisals

January 5th, 2010

There are typically three main issues that can stop a potential real estate transaction dead in its tracks - the home inspection, the mortgage approval, and the appraisal. Let's talk about appraisals.

The problem with appraisals in today's real estate market is that properties sold via a short sale, sheriff sale, or foreclosure are being used as comparables when evaluating the price of a regular home. About 25% of realtors have had a sale fall apart because of a low appraisal. The National Association of Home Builders reported that 25% of their new home sales likewise were shot down by low appraisals.

In 2009, over one third of all home sales nationwide were either foreclosures or short sales. A short sale, of course, is when a lender let's the property sell for less than the amount of the loan, figuring its better to unload the property quickly, get some cash, and move on. These properties, on average, are selling for about 25% less than a property not in distress.

In an appraisal, the appraiser uses an approach in determining value by comparing similar recently sold properties in the same area. Allowances are made for differences, such as more or less bedrooms, a detached garage, swimming pool, etc. In a normal real estate market, where foreclosures are rare and short sales nearly unheard of, this is an effective method to determine true value.

But in today's topsy turvy real estate market, appraisals show no differentiation in a distressed sale vs non-distressed sale. And therein lies the problem. They are, after all, two different markets. And so, the family that always paid their mortgage is being penalized because their property is being weighed down by those that didn't or couldn't handle their financial responsibilities. Is that fair?

Buyers attempting to purchase a conventional property nowadays basically have three options when the appraisal comes in under the agreed upon price. Either make up the difference in cash, get the buyer to lower his price, or do a cash-only deal (using a home equity if necessary).

Until the real estate world returns to normal, "appraisal" will continue to be a four-letter word to realtors, builders, buyers, and sellers. Let's hope the end is near.

- Mountain Man and City Girl

http://www.MountainManandCityGirl.com