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I apologize if this has been covered in a previous post, but my search did not turn up any useful threads on the topic. I am not currently selling my house, but I keep track of the homes for sale in my neighborhood. I recently learned from our HOA that one of our residents has moved out and the home has gone into Foreclosure. When this home is sold as a foreclosure, will the sale price just get lumped in with all the other recent comps in my neighborhood, or woudl a RE agent pulling comps disregard the numbers from the foreclosure? I am assuming that there is a good possibilty that the sale price will be lower than other recent sales since it is a foreclosure. Like I said, I am not selling so I doubt this will affect me 5-7 years down the road when I do plan to sell, but I am just curious how that is handled in general when looking at comps.
When it sells, it will be looked at as a comp. Now, that being said, IF the appraiser (or agent) knows it was a foreclosure, and IF it is an anomaly sale, in other words it sold for $300k and all the others sold at $350K, it may not hurt you too bad. But, unfortunately, right now, with sales so slow it may be the ONLY comp. when it sells.
A foreclosure is usually considered a non-arms length transaction and aren't used in an appaisal, and a realtor should not use sold foreclosures as comps. Unless foreclosures become a trend in your neighborhood or are the only available recent solds, it won't have a major impact on prices...though it will have some.
If you were selling now, that foreclosure would be your competition, and unless you can wait for that home to sell first, you would be well advised to take it's sales price and condition into consideration when pricing your home.
Appraisers search the sales history of all potential comparables. Simply because a property sells does not make it a comparable. Sales that are generally excluded from use as a comparable are any where there is a lack of an arms length transaction. This includes divorce sales, tax sales, foreclosures, estate, and condemnation sales. None of those types of sales reach the definition of market value.
Quote:
DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.
*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market's reaction to the financing or concessions based on the appraiser's judgment.
From Fannie Mae form 1004, Uniform Residential Appraisal Report
*my emphasis added
Until such a time as there are so many foreclosures that they establish the total market, a foreclosed house should not be used as a comparable and will have no effect on the value estimate of your house. As you can see from the definition, IF the foreclosure is included as a comparable (and it might be if it is the most similar to the subject in the market area) then an adjustment reflecting the market response to a foreclosure must be made.
You may also discredit homes that are not very similar to yours in sq. ft., amenities and general features as an appraiser will not initially look to make his or her job more difficult by making major adjustments that will come under question during review by the bank, the listing agent, appraisal board, and the selling broker, when there are other homes available. I just spoke to an appraiser and while your subdivision over the past 6 months is an initial starting point and carries the most weight (the last 12 months for historical data) they will go up to .5 to 1 mile unless they can STRONGLY justify how unique your home is to look further.
FWIW, I've been appraising for 25 years, I teach at an appraisal school and am a hearing officer for the Disciplinary Committee for the Oklahoma Real Estate Appraisal Board.
The KEY to exceeding preferred Fannie Mae Guidelines is to explain what you are doing and why you are doing it.
^ I think you're missing the point, foreclosures are usually not a frequent occurence in a stable neighborhood. A person's financial situation has no bearing on the value of the property or as you said "they took on more than they could chew.
Suppose in a given neighborhood there were 5 sales in the previous month; 4 were regular sales & 1 was a foreclosure. The regular sales averaged in the $90,000 to $100,000 price range while the foreclosure sold at $80,000. The true market value is reflected in the regular sales and not in the foreclosure.
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