Four States Consider Legislation Barring Distressed Sales as Comparables

by Chicago Agent

Illinois and three other states – Maryland, Missouri and Nevada – are considering legislation that would prohibit or restrict the use of distressed sales as comparable sales as a part of a residential real estate appraisal.

Industry professionals are concerned that the prevalence of distressed sales, and their subsequent use as comparables, is resulting in the appraised value of residential properties not matching the contract sales price, or in the case of new construction, the cost to build.

“The notion that you are going to excuse foreclosures from the calculation of value means that as much as you would like it to be higher, the value you are assigning the house will be overstated,” says President and Chief Executive of the Nevada Bankers Association Bill Uffelman, according to USBanker. “It will be contributing to a new bubble.”

The Illinois legislation, known as HB 0092 would prohibit appraisers for the next five years from using as a comparable sale “a residential property that was sold at a judicial sale at any time within 12 months.”

The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained in the Maryland legislation are somewhat broader and include any property that was sold under “duress or unusual circumstances, such as a foreclosure or short sale.”

There is, however, conflicting language in the Maryland legislation that appears to allow for the use of distressed properties as comparables if the appraiser takes into account factors such as the motivation of the seller, the condition of the property and the property’s history or disposition before the sale. Appraisers in Maryland will oppose this legislation during a hearing March 29.

If these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers “must analyze such comparables sales as are available.” Further, the standard cannot be voided by a state or local government.

Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation – which in the case of federally related transactions would be a violation of state law – or to violate the law prohibiting the consideration of distressed sales as comparables.

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  • Lori Realtor says:

    Soooo…..we should exclude the reality of these comps from establishing an appraised price BUT be sure to include them as comps when the assessors office is determing assessed value for tax purposes. (At least in my market place that is what homeowners would like to see.) Hmmmm….. Bill Uffelman’s statment that “it will be contributing to a new bubble” – hits it on the mark.

  • Terence Harris says:

    In many areas the use of distress sales may not be avoidable. The problem is when you have appraisers only using these again a property that has been completely rehabed. I have inverstors that are interested in buying and rehabbing in areas that have been hit hard by current maket. The problem comes in when they go to sale and these apprasiers form out of the area come in and use properties that are distressed sales with the completed ones. It in my eyes it looks like they are working hard to keep areas low in value. I have several deals that have died due to this practice. We have NO way of reporting these problems where they will be taken seriously. So you apprasiers keep killing ours values at no cost to them. I believe they need to be reviewed based on the number of low ball values they give and have to justify them or be penalize like they hurt these areas..

  • Dan W says:

    Terence – You have identified the problem exactly. Appraisers and assessors don’t have enough information to differentiate between updated and
    vandalized or unrenovated properties. This results in tax bills on brick shells that are almost as much as the value (hence lender walk-aways). Simultaneously financing to renovate or sell properties once they are rehabbed falls through. It seems the best approach would be to legislate that MORE information be required or allowed (eg building permit data) than less in order to better describe the market for both transaction and taxation purposes.

  • Gary says:

    A core premise of an appraisal is “like kind ” properties for comparable sales. A boarded up junker with a foot of water in the basement is not comparable to a well maintained home. However, if an investor buys the junker and it is professionally rehabbed, that property is a legitimate comp to others in the area. It will probably sell for a little more, since it will be like new if the rehab was first rate.

    Another issue is “as is” properties sold as short sales or foreclosures. These cannot be considered comparable to “regular” houses. In many towns, to buy a house as is, a buyer has to get an inspection, post a cash escrow, get necessary permits, perform the repairs, get the house reinspected and then the escrow gets released. Many buyers today do not have excess funds for escrows, repairs, and inspections and local fees.

    I agree that in some areas it can be hard to find comps without using distressed sales. In some towns, there may be 20 closed transactions in a month. 12 were foreclosures, and 6 were short sales and 2 were regular. But please don’t use distressed houses to comp traditional sales.

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