Do Appraisals Consider Foreclosures as Comparables?

Under the Home Valuation Code of Conduct created by the Federal Housing Finance Agency, appraisers are neither required to nor prohibited from using foreclosures as comparables. Appraisers must draw on their expertise to conclude whether foreclosure data should be applied in a specific territory. In areas saturated with foreclosures, appraisers might have little choice but to use distressed sales to support their evaluations.

Appraisers examine the underlying motive of transactions when researching comparables. Like private owners and sellers, banks don’t want to lose money on the sale of real estate owned properties. Because the lender is no more or less motivated than a private seller, appraisers may conclude that a foreclosure makes a fair comparable. Conversely, short sales are often driven by desperate sellers, thus disqualifying the homes as good comparables.

By pulling down real estate prices, foreclosures often cause standard transactions to stall. When appraisals come in significantly below the negotiated price because foreclosures were used as comps, a contract usually dies. Sellers don’t want to accept a lower price, yet buyers and lenders don’t want to shell out more than the home is worth. The more foreclosures in your neighborhood, the more likely the appraiser will consider them to be similar properties.

To reduce the likelihood of a low appraisal, take an active stance during the appraisal process. Provide the appraiser with a list of renovations, especially less obvious updates. Though you can’t try to sway the appraiser to hit a certain price, you can make documents and receipts available. On appraisal day, make sure your house is in top condition. Some agents pull comps and provide the list to the appraiser, noting distinctive features that set your property apart. Review the final report for mistakes and ask for corrections. Request a second appraisal if necessary.