| Appraisers use sales of homes that were made as | | | | sell for less than their fair market value or the current |
| arms-length transactions where neither the buyer was | | | | market value of similar properties, even if there is |
| desperate to buy nor the seller was desperate to sell | | | | nothing physically wrong with them. Appraisers know |
| as a basis for comparing other similar properties in an | | | | that the sellers may not even have wanted to sell, |
| area and estimating fair market values. A foreclosure | | | | which can easily skew comparable valuation data. |
| property does not meet these criteria because of the | | | | Properties owned by banks after a foreclosure |
| nature of the legal process that the house is | | | | auction has taken place are only a little different. In |
| undergoing and the extra inducement that sellers have | | | | these types of cases, banks may not take care of the |
| to find a buyer before they run out of time. | | | | houses which then fall into disrepair quickly, or vandals |
| Houses in foreclosure are typically classified as | | | | may strip them for any useful resources like copper |
| distressed properties, which means that there is | | | | pipes and electrical wiring, for instance. Banks also do |
| something wrong with their physical or legal condition | | | | not want to own these properties as they are a drag |
| that induces the owners to sell for less than the fair | | | | on the balance sheet and are often willing to entertain |
| market value of the property. In some cases, this might | | | | lower offers from real estate investors or buyers |
| mean a condemned house that the government has | | | | willing to fix up the properties. |
| ordered repaired or taken down, one that has been | | | | But again, these types of sales are not between a |
| severely damaged by a natural disaster, or one that | | | | disinterested buyer and a disinterested seller -- in most |
| has fallen into disrepair as a result of homeowner | | | | instances of foreclosure, the seller is willing to unload |
| neglect in upkeep. | | | | the property for just enough to make it worth their |
| In such cases, the buyers of a distressed house are | | | | while and attain their goal of either avoiding foreclosure |
| able to offer the sellers less than what the property | | | | or unloading an asset that generates no profits. |
| would sell for if it was in a fairly decent condition. But | | | | Owners want to sell to save the house and their credit |
| these types of houses are also difficult to compare to | | | | from foreclosure, while banks just want to unload |
| other houses in the geographic area that are in better | | | | foreclosure properties from their balance sheets and |
| condition or where the owners have no added | | | | get back to other lending activities. |
| reasons to unload the property. | | | | Thus, foreclosure properties are not good candidates |
| Foreclosure cases work slightly different compared to | | | | for comparable sales used in appraisals, except for |
| a house that is falling apart or damaged, but the lack | | | | possibly comparing sales of other foreclosed homes. |
| of time many people have to sell before losing the | | | | Appraisers would much rather use home sales that |
| home to a county sheriff sale indicates that the buyers | | | | were not completed under duress, because a certain |
| have the upper hand in negotiating a beneficial price in | | | | home was condemned, sales between family |
| order to complete the sale before the eviction. The | | | | members, or foreclosures. The values have too great |
| current owners may not really want to sell the house | | | | a tendency to become distorted as one party to the |
| to stop foreclosure, but have run out of other options | | | | transaction has more power and a better negotiating |
| that would have allowed them to keep the property. | | | | position than the other. |
| This is one reason that properties in foreclosure often | | | | |