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Distressed Properties as Comps?

Many of our real estate appraisal clients in Maryland have asked us if we use distressed properties (short sales and foreclosures) as comparables when doing an appraisal on non-distressed properties. The Appraisal Institute issued a paper on the subject which we feel explains the situations and circumstances when the use of distressed property sales is warranted. In the paper, the Appraisal Institute explained that:

“Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces.”

On whether an appraiser should use distressed properties as comparables, the Appraisal Institute was very direct (all items in bold were shown as bold in the original paper):

“An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.”

And they explained the possible differences between short sales and foreclosures:

“A short sale … might have involved atypical seller motivations and so might not be an ideal comp…

A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”

Bottom Line

Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be.

About MDappraisal

Our certified appraisers have over 40 years of combined experience in the valuation of real property for the mortgage lending industry as well as the state and federal courts. MDAppraisers.com provides effective and efficient appraisals for all of your appraisal needs.

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