Do Foreclosures Affect Appraisals?

Equity in your home is the difference between what you owe on the property and its current value. One way to obtain an estimate of your property’s current value is by having an appraisal done on the property. The final sale prices of comparable homes in your neighborhood affect your home’s value. This can include foreclosures.

Appraisal

A licensed or certified appraiser prepares an appraisal. An appraisal is an estimate of what a willing, able and ready buyer might pay for the property in the current market. If local foreclosures reflect the current market, then the appraiser would probably include a foreclosure, if comparable to the subject property.

Loan Appraisals

Before granting final loan approval, a lender typically requires the property to appraise for at least the selling price. If the property fails to appraise for the selling price, options to close the loan include the buyer increasing the down payment or the seller lowering the price. When foreclosures are a reflection of the current market, and not an isolated incident, they affect the amount a lender might loan on the subject property by lowering appraisal amounts.

Appraisal Method

The sales comparative approach is the appraisal method best suited for residential properties. It involves averaging the adjusted sale prices of comparable properties in the neighborhood that sold within the recent history. When selecting comparables, the appraiser avoids properties that don’t reflect the current market. Even if a recently sold house is identical to the subject property, it may not reflect the current market.

Not Reflection of Market

If similar homes in your neighborhood regularly sell for about $200,000, and your neighbor decides to sell his home to his son for $50,000, the neighbor’s sale price does not accurately reflect the current market of the neighborhood, because the circumstance of the sale is unique to the transaction. Sometimes foreclosures are viewed in a similar light, in that they more reflect the situation of the seller, and not the market condition of the area.

Foreclosures

When overall foreclosures rates are low in the community, appraisers are more apt to eliminate foreclosures from the equation. The circumstances surrounding your neighbor’s foreclosure might be an isolated incident. Yet, once foreclosure rates increase in the area, they become less an isolated incident and more a reflection of the overall market and economic conditions. When the housing market is thriving, an isolated foreclosure in your neighborhood probably won’t factor into the appraiser’s estimation. Yet, if the market is slow, and there are several foreclosures in your neighborhood, they normally affect appraisals.

References

• "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006