Why shouldn't appraisals include foreclosures and short sales?


The National Association of Realtors and other housing industry types are none too pleased with the effect that real estate appraisers are having on the market.

The NAR reports that 17% of its members have lost a sale due to a low appraisal and 20% say that they've lost more than one deal. NAR chief economist Lawrence Yun blamed "faulty valuations that keep buyers from getting a loan" for May sales figures that weren't as strong as many had hoped.

But by far the dumbest complaint coming out of the real estate agents is the notion that including foreclosures and short sales as comparables when appraising non-distressed sales is somehow unfair. There are two reasons that this bellyaching is silly:

  1. Why the heck shouldn't foreclosures and short sales be included? A comparable property sold in an arms-length transaction is a comparable property sold in an arms-length transaction. Sure, having to compete with distressed sales is tough for sellers who just want to trade up or relocate, but there's really no rational reason to exclude a sale from an appraisal because it's a foreclosure.

  2. Including foreclosures as comps is appropriate and conservative because if a bank has to repossess a house, it will be selling it as a foreclosure. So actually, foreclosures are very appropriate properties to base appraisal values on because they provide an idea of what a property's recovery value might be.

Please: Don't let sleazy real estate propagandists convince you that the appraisal industry is hurting the real estate market. These people have absolutely no credibility.

Did you ever once hear Yun complain about inflated appraisals during the bubble? No, of course not. These people will support anything -- no matter how insane -- that will lead to higher prices and higher sales.

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