When you’re selling your home or seeking a refinance, Realtors and appraisers will “run your comps” which basically means looking at houses in your area with the same comparables to you. Same # of bedrooms, same # of bathrooms, garage, basement, etc.
It’s usually a six month window and they’ll factor in every house that’s been sold that’s comparable in structure to determine the price of your house.
I would argue that foreclosed houses should NOT be factored in to the comp calculation for a few reasons:
Foreclosed houses are not comparable. This is the biggest one. They simply aren’t. Foreclosed houses are abandoned properties. Does the washing machine still work? Does the roof have mold? Was there $10,000 of copper stolen from the crawlspace? Are all the windows broken? Who’s even been there to keep up with routine maintanence?
This as compared to a homeowner who currently lives in the house, does repairs, and can shoo away the copper theives.
Foreclosed properties drag everyone’s price. When a bank sells a foreclosed house it’s just trying to get a property off its books and make a bit of cash to boot. But what happens is that when you sell a $100,000 home for $20,000, suddenly everyone in the neighborhood has houses worth $50,000 because of those calculations. It becomes impossible to sell your home for any realistic value once foreclosures start selling.
When these calculations start ruining the values of everyone in the neighborhood, it becomes impossible to sell (or get refinancing) because everyone instantly becomes underwater on their homes. This hurts the Realtors’ bottom line, certainly, but also hurts homeowners who simply cannot afford to sell their houses.
These foreclosed houses are being bought for an entirely different reason. They’re bought “as-is” for cheap because the people know they can flip the home for a profit after some handi-work. That’s not the same as a person looking to buy a home from a homeowner to live in.
So why do we have a system where the banks hurt, the Realtors hurt, the homeowners hurt all because we’re comparing a house that may have 3 bedrooms and 1.5 baths just like yours…but in reality isn’t remotely comparable?
The question from the appraiser’s perspective, at least, is what they’ll be able to sell the home for if you fail to make the first mortgage payment. The presence of cheap foreclosures on the market doesn’t just appear to make your home cheaper – it actually does make it cheaper, because people moving into your area can choose to buy a foreclosed house and make improvements (a phenomenon not limited to speculators).
Of course, if all the copper is missing, that should go into the price. That’s the real rub, because appraisers don’t inspect the comps. So I would pin the problem on assumptions made about the foreclosure comps, and not the inclusion of foreclosures per se.
Even then, most problems that a foreclosed home will have are of the 10k-15k variety, a relatively low percentage of overall value. So even if those risks are properly adjusted for by the appraiser, foreclosures are still going to lower the price of your house. That’s just the nature of a recession: housing supply vastly exceeds demand at the same time that people can’t make their payments. Buyer’s paradise (except that lending standards are tight enough to turn coal into diamonds).
In our experience in NY, none of the people involved in the sale used foreclosed house prices in their calculations. Neither did the tax assessor when grieving our property taxes.
I disagree with #1 and #4 as blanket statements. There are some beautiful foreclosed homes in our neighborhood that are not at all fixer upper opportunities. The bank shows up to maintain the house. They are no different than the non-foreclosed on homes in our neighborhood that sit empty until they sell when someone moves out of state. And they aren’t flipped, the people who buy these homes move in.
It’s not at all like that in our neighborhoods! We’re lucky if anyone comes by every couple of months to mow the lawn.
But OK, let’s say I were to grant you that foreclosed homes in some areas are well kept and sold at a reasonable rate in line with other houses in the neighborhood. In those cases, the non-foreclosed homes aren’t being dragged down in appraised value due to the foreclosures in the area. And if you take away those foreclosures from comps, it wouldn’t affect the price at all.
So there you have a situation where adding comps in doesn’t lower the price and in other cases adding in the foreclosures unnaturally and radically moves the price downward. In both situations, using foreclosures as part of the equation does nothing to help one determine the true value of a currently owned home.
Any comparison will take into account all those factors you mention, such as missing plumbing, damage, mold, etc. An appraiser will add or subtract amounts representative of the difference in value.
I agree that foreclosed properties may drag down neighborhood values, but so will any sale below previous values. There can be many reasons why a property sells for less than you think it is worth – personal finances, non-arms length transactions (sales to relatives), for example. These reasons are not shown in public records, and an appraiser would have a hard time compensating for them anyway.
It’s too bad, but past sale prices help determine future ones.
In appraising a property, an appraiser will also do a replacement cost analysis and compare it to sales, so comps aren’t the only factors used.
Appraisers should use a much more conservative means of valuing houses than looking at recent comparable sales in the area. Those things mean nothing in an unstable market. The land and property development should play a larger factor. If this lowers the appraised value of houses it shouldn’t make a difference if lenders are requiring a sufficient down payment. I don’t know about everywhere, but in the places I’ve lived, tax assessments traditionally were below market values. If the assessments are done fairly, it doesn’t matter at at all for taxes because the housing values are proportional. Lenders should likewise be more concerned with the relative value of a property when qualifying a loan. Both bubbles and bursts tend to exagerrate the values at the bottom and top end.
Addressing foreclosures directly, the number of foreclosured properties for sale should affect property values because they will sell at lower prices. Foreclosure sales which are followed by occupation and rehab if necessary will increase values, while speculative foreclosure purchases still lower the values. So…I have no idea how to reconcile those factors, except to make them irrelevant.
Well, they do bring down the prices of other houses, because the bank is willing to loose money on them.
There is one up the street that I walked through five years ago when it was a model - and liked it a lot. Around $600k. The bank is letting it go now for $350k.
They probably won’t. Realtors and bank appraisers only get a select amount of information to work with. Sale price, age of house, # of bedrooms, # of bathrooms and square footage are the biggest factors in determining whether a house is comparable. If you’re lucky, you’ll find out about recent renovations such as roof replacement or kitchen remodel, but you can’t count on those to be available without a bit of digging.
Now, in it’s possible that one can knock on the home of of a recently sold foreclosed home and ask “hey, just curious, when you bought the house were all the cabinets ripped out and the fridge door left open and the lights all busted out?” In theory, you could go to that level of detail when making your calculations. In theory, the Higgs Boson particle exists but no one’s yet been able to observe it.
Of course they should be included. All homes that were bought and sold should be considered in the market comparables. A house that was $100,000 and sold for $20,000, wasn’t a $100,000 home. People buying a house don’t care if it was or wasn’t foreclosed…they are looking at square feet, number of bedrooms and bathrooms. The foreclosure says nothing about the property itself…it says more about the previous homeowner and their ability to pay.
When you sell your car, does the buyer negotiate with you saying you should lower your selling price because last week at a police auction, they sold the same model car for $500?
That comparison is not apt because those police auction deals are such a small pecentage of the ‘market’ in used cars. In the past when foreclosures were a similarly small percentage of the housing market they had little effect on pricing. They were regarded as that rare deal that you were lucky to stumble across.
In the current housing market foreclosures must be considered relevant due to the high numbers in some areas. IOW foreclosures have become the market due to their prevalence over conventional sales.
Obviously, not all local housing markets are the same so YMMV.
Appraisers visit the subject property, but may not visit the comps, so that’s half right. However, they have access to the MLS, which includes pictures, and I have had appraisers call me up to ask about a property I sold for exactly the reasons mentioned here – they suspected there was something I could tell them that didn’t show in the official records, whether good or bad.
In Dearborn Heighst, outside Detroit ,there are lots of empty homes and foreclosures in process. There are 2 homes down the street from me that were built about 7 years ago. They sold for 350 K. One is empty now and is up at 175. They are getting no bites.
A brick ranch down the street ,corner house, sold lately for 48 K.
How do you evaluate homes now?
If it was the same number of miles on it, the same make and model…sure. That’s one comp that should be factored in. You can’t pick and choose what you think the market is. If foreclosed houses are part of the market that are available to buyers then you can’t logically exclude them because they make the market values appear to be worth less.
Inversely, let’s say the house on the corner was purchased by a foreign buyer over the internet and paid a 50% premium over the other recent sales in the neighborhood, simply because they needed a house fast and didn’t want to take the time to shop around. Would you say that sale should be excluded from your market comp analysis. I doubt it.