How to Use Distressed Properties in Appraisals

Distressed housing sales offer challenges for appraisers.

An appraiser's job involves determining the worth of a house or business and writing a report to justify the value. Banks, credit unions and private lenders use this report to assess the risk of making a mortgage loan on a particular property. Appraisers use comparable sales, or comps, in the area as one measure of value. When a distressed property, a term used to describe a property or a home sold at a price less than the mortgage amount, sells well under the average price for the neighborhood, this creates a situation the appraiser must document for the lender.

Instructions

1. Use the real estate Multiple Listing Service to collect recent copies of information for comparable home sales reports for the neighborhood. Recent sales should be within the previous six months, although some banks allow comparable sales up to a year old. Isolate the lowest sales prices and separate the reports. Some sales reports list home foreclosures or advertise homes as short sales. Contact the sales agents on the group of properties without such notations to determine if the sale was a distressed sale involving a short sale or foreclosure.

2. Print out sales reports from the multiple listing research service for distressed properties. Attach this information to the distressed properties in the sorted property stack. Include any photographs and narratives describing the property and structures.

3. Use the information from the local real estate Multiple Listing Service to contact the selling agents listed on the separated properties to collect any additional photographs or reports on the distressed properties.

4. Contact the homebuyers using the Multiple Listing Service information of the distressed property and request a copy of home inspection reports and any additional photographs of the property as it looked at the time of the sale. Describe the reason for the request and the importance of the information to your particular appraisal.

5. Use collected information and photographs to create a report for the appraiser and lender showing the condition of the distressed properties and any sales of comparable properties sold without using a short sale or mortgage reduction. This report helps the lender track the two classifications of sales for the neighborhood, regular sales and distressed property transactions.

Tips & Warnings

• Work with a licensed real estate agent with access to the Multiple Listing Service.

• Mortgage companies develop in-house policies related to the use of distressed properties as comparable sales in lending. There is nothing an agent or appraiser can do to modify or alter company policies relating to using distressed properties as part of the official appraisal for qualifying for a home loan. Presenting the lender with information on the distressed properties allows the lender a method to examine a proposed mortgage with a clear guide to regular sales transactions and distressed home sales.

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References

• "Become a Real Estate Agent"; Pamela Gray and Jennifer James; 2007
• "USA Today"; Foreclosures Weigh On Home Appraisals; Jan. 8, 2010
• Cambell Survey; Housing Pulse Tracking Survey; HousingPulse Distressed Property Index Rises for Month; April 25, 2011
• Real Estate Economy Watch; Nearly Half of Sales Now Distressed Properties; Steve Cook; April 25, 2011
• StamfordAdvocate.com; Distressed Property Appraisals Investigated; Richard Lee; June 20, 2010
• "New York Times"; Financing Foreclosed Homes; Maryann Haggerty; May 12, 2011

Resources

• "New York Times"; Finding Bargains; Aug. 7, 2005
• Appraisal Institute: Appraising Distressed Commercial Real Estate-Here We Go Again