How Do Short Sales and Foreclosures Affect Home Prices?

Posted by Amrock
When appraising a home, the appraiser uses all the
information available to them in order to provide the best possible opinion on
the value of the property. This includes using comparable properties that will
frame what other similar properties are valued at, this can include distressed
sales. Distressed sales, in other words, are foreclosures and short sales.
That means that distressed sale values in a given market
could possibly affect the appraised value of a property, depending on its
proximity and how prevalent short sales are in the neighborhood. Before we get
too far, let’s talk about the two major types of distressed property,
foreclosures and short sales:
Foreclosure is a term used for a situation where
the borrower (someone who pays a mortgage on a property) fails to make
principal or interest payments on their mortgage. If adjustments for repayment
of the loan are not made, the situation leads to the lender seizing the
property.
Short Sales are, in laymen’s terms, the process of
selling a house for less than what is owed on the property. This happens when
the lender and borrower decide to sell the property at a loss to reduce the
risk of the borrower going into foreclosure on their loan.
Its the appraisers job to
analyze distressed sales in a given neighborhood to determine the effect on the
neighborhood. If the neighborhood has a significant level of distressed sale
activity, they may have to consider
foreclosures or short sale comparables in the neighborhood to help them draw a
more accurate conclusion about the value of the property. What could this do to
the property values of homes that are still on the market? Simply put, values
could go down. This is because the short sale values are included in the
overall market value range.
foreclosures or short sale values within the surrounding
area to help them draw a more accurate conclusion about the value of the
property. What could this do to the property values of homes that are still on
the market? Simply put, values could go down. This is because the short sale
values are included in the overall market value range.
However, this doesn’t mean that the distressed property
value is weighted the same as other comparable properties. Comparables that
were sold at a market price will often be weighted to hold the majority of the
value when determining a property’s value.

For more information on appraisals, feel free to visit us
at www.TSIAppraisal.com.