Are Short Sales Good Comparable Sales to Use in Appraisals?

Are Short Sales Good Comparable Sales to Use in Appraisals?

At recent NAR meetings, professionals discussed issues with using short sales as comparable sales.

Because many aspects of the short sale are not public record, an appraiser has a difficult time determining how to adjust the short sale when used as a comparable property.  

Because a short sale is not a simple willing buyer and willing seller transaction, adjustments to the price should be made if used as a comparable sale.

The appraiser needs to interview all the persons and organizations involved in a short sale to determine these non-public record issues.

Many times the seller is financially distressed brought on by medical bills, job loss, divorce, failed business, etc. and unwilling to return appraiser calls.  The seller may even relocate and be nearly impossible to find.  Without the seller discussing the issues, the appraiser has incomplete information.  

Lienholders are large corporate bureaucracies that are difficult to contact and often unwilling to provide information due to lawsuit risks over issues like privacy.

Many times, undisclosed payments are made to junior lienholders to settle their debt.  Payments can come from the seller, the buyer, friends, relatives, government, etc.  

Senior lienholders may write off more or less debt due to factors such as seller threatening bankruptcy, strategic foreclosure, foreclosure counter lawsuits, hiring a defense lawyer, lienholder PMI settlements, lienholder investor direction, lienholder accounting/tax/profit considerations, etc.  

Without this information, the appraiser has incomplete information to make adjustments to the short sale used as a comparable.

In short sales, the lienholders often force real estate agents to take a commission reduction.  Finding this information is difficult for the appraiser.

Because the payments and reductions are not public record, there is no way to verify information provided by the seller, the buyer, the lienholders, the real estate agents, the closing attorney, etc.  Memories can be faulty, documents can be altered, people can give incomplete/false/misleading information to the appraiser.

REO sales can present similar issues.  The condition and repair requirements on REO properties can make those adjustments difficult to make as well.  REO sales often entail the buyer shouldering the cost for many repairs.  Repair cost information is difficult to obtain and verify.

Real estate agents can provide appraisers with information and additional comparable sales.  Due to HVCC appraiser rules, the appraiser may not have full access to real estate information or experience with the local real estate market when traveling to various regions of South Carolina.  Providing information to the appraiser may help make the valuation more accurate.

NAR added an Evaluation Section and removed the Appraisal Section during the recent annual meeting.