Appraisers look at comparable sold properties to draw an analysis of value.  Many lending institutions have rules which require the properties to be sold within the last 6 months and be within a reasonable distance to the subject property.   The appraisers would typically look at similar homes which sold through an arms length transaction.  The KCM Blog shows us a different spin.

KCM Blog

Many of our readers ask us if appraisers use distressed properties (short sales and foreclosures) as comparables when doing an appraisal on non-distressed properties. We have posted on this issue on several occasions (examples: here and here). Last month, the Appraisal Institute issued a paper on the subject. In the paper, the Institute explained that:

“Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces.”

On whether an appraiser should use distressed properties as comparables, the Institute was very direct (all items in bold were shown as bold in the original paper):

“An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.”

And they explained the possible differences between short sales and foreclosures:

“A short sale … might have involved atypical seller motivations and so might not be an ideal comp…

A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”

Bottom Line

Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be.

Related articles

• Clearing up Short-Sale misconceptions (lansner.ocregister.com)

Many people know that we are now undergoing the longest, slowest, most painful recovery the country has ever experienced.  Now in January 2012, two and a half years after the recession “ended”, we are seeing hopeful signs of life in some areas of the economic picture.  The unemployment rate in Massachusetts has fallen to its lowest level in a long time to 7.3%.  Some industries are beginning to experience growth and we can only hope they continue to hire and create new jobs.

One area we continue to struggle with is housing.  The actual loss of wealth for so many people in this country is staggering.  The California Association of Realtors has released its real estate forecast for 2012. 

It is interesting to see that in 2005 they sold 625,000 homes and in 2007  that number dropped to 346,900—a 55% drop in the number of sales.  The median price of homes in 2005 was $522,700, but by 2011 the median prices have dropped to $291,000—a 56% drop in value.   All real estate is local, but some parts of California, Nevada, and Florida have experienced over 75% loss in value.

Massachusetts, and particularly Boston, has fared much better than many of the states.  Trulia has come out with its top five places slated for a quicker recovery:  Austin, Houston, San Jose, Boston, (and in particular Cambridge, Newton, Framingham, and Worcester) and Rochester, NY.  Austin and Houston have seen jobs and new construction get a jump-start.  San Jose and Boston areas are home to the technology belt with lots of smart, well-educated people, and Rochester  has had stable prices and economy throughout the downturn.  The take away is that highly educated, tech-savvy cities may push through the recovery quicker than other parts of the country.

Realtors have not been able to see the bottoming of prices yet,  but I expect this year will be it.   Once we have hit the bottom, it will be a slow climb back up, but there truly is light at the end of the tunnel.  I first saw the warning signs of trouble in 2005, and after 6 years of serious turmoil,  I believe we are past the worst.

The new economic reality may be something we have to get used to, because this complete recovery may be many years in the making.  Some people, like seniors, who have done everything right, have had their planned retirement future smashed by the dramatic loss of wealth.  We are already seeing not only seniors, but young college graduates moving back to the family home.  This may be the new reality for now as we all adjust to the slow recovery.  But I am looking forward to 2012 as our turn around year.  What do you think?

The Realty Trac Map demonstrates the most serious regions of the country.   The Boston area has not been as hard hit as many regions of the country.  Even though Boston may have a 67% increase in new foreclosures, it means an additional 1340, while Southern California is expecting an additional 4300 new foreclosures. 

Many people are thinking it is a good idea to take their homes off the market for the holidays, but given these statistics, nothing could be further from the truth.  The spring market may simple produce an increase in inventory.   

The good news is that Fannie Mae and Freddie Mac have learned their lesson about foreclosed homes they own.   They will winterize the properties, but they do not turn off the heat.  The damage that can be done to homes due to lack of heat can be costly.   The lack of air flow and changing moisture levels cause damage to the walls, wood flooring, and woodwork, and the potential for mold can be increased.  

Serious buyers are still looking for the right home.  Sellers, keep your home on the market.  Take advantage of the low-interest rates and the moderate inventory now.

A recent article in the Worcester Telegram and Gazette noted that the home prices across Massachusetts had fallen about 14% since 2006, but the Warren Group, which tracks all sales in the state, report that the home prices in Central MA have fallen 27% in that same time frame.

It will certainly take Worcester County longer to recover from this downturn than the Boston area. Employment figures confirm that Boston  unemployment is 6.8% and the Worcester unemployment stands at 8.4%.  Even though there is quite a wide discrepancy between Boston and Worcester, but both numbers are better than the national unemployment of 9.2%

Nationally, the Builder Confidence Level is in the positive realm, because there are more new housing starts most notably in the West.  The positive signs in many areas of the market belie the Consumer Confidence Index at 39.8%, which says the consumers believe we are still in a very serious recession.

This video from the National Association of Realtors give some glimpses of light at the end of a long dark tunnel.  We can all use some good news.  Young people are starting to look at homes because they have faith that things will improve, and it could not be a better time to buy. Interest rates have never been lower and prices are excellent.

When will the government realize that supporting new construction is a necessity for a complete recovery of the economy?  Jobs are important, and new construction creates jobs in many fields. Instead of supporting the building and real estate businesses, the congress seems to be putting up road blocks to the recovery of this industries.

The National Association of Home Builders‘ Assistant Vice President, Robert Dietz, testified before the Senate Finance Committee last week that the decline in home construction has been historic and unprecedented.

The building industry has had an 80 percent decline since the peak seen in 2006 in single family new construction. Just let that begin to sink in….80% decline in an industry which creates 1,000’s of jobs!!  Plumbers, plumbing supply companies, electricians, electrical supply companies, truck drivers, gravel companies, back hoe drivers, foundation forms people, concrete companies and drivers, framers, finish carpenters, roofers, lumber yards, masons, painters, carpet installers, carpet stores and manufacturers, kitchen designers, appliance stores and manufacturers, bull dozer drivers who spread loan and landscape people who put in lawns, nurseries who provide shrubs, and many more.  Then we can talk about the Realtors who sell the new homes, mortgage  loan officers who finance the houses, title companies who research the title, insurance companies who insure the property secretaries who prepare closing documents, and lawyers who close the transactions.  There are approximately 80 people who touch a traditional real estate transaction, and that number is greatly multiplied for a new construction sale.  When the reports for unemployment talk about a 9.1% rate, remember the real number is more like 18%, because many of the people in the building and real estate industry are self-employed and they don’t show up on the unemployment numbers.

The rate for building single family homes is now 353,000 homes per year as opposed to the 1.8 million in 2006.  Based on these numbers we will soon see a serious shortage of homes.  We are also seeing a troubling turn of events with many people loosing their homes to short sales and foreclosures and having to move in with family.  We are seeing many young people graduating from college with no job prospects, and they are moving back home with mom and dad.

This will be causing a future shortage of homes and when the economy finally recovers, we could be in for some difficult times.  This may put pressure on prices of homes, because there will not be enough houses to meet the demand.   Building is one of our core home-grown industries, and we must bring some stability to the builders.

Congressmen in Washington have been threatening to eliminate the mortgage interest deduction, to end federal support for the mortgage industry through Fannie Mae and Freddie Mac backed financing, and to require a minimum 20 percent down payment on home loans.  The FHA mortgages already require an additional charge for insurance, making it more difficult and costly for buyers to get financing.  These steps are being proposed by a government that says it is trying to get the economy on the road to recovery, and many of these proposals are counterproductive.

Here are seven tips for navigating the short-sale process.

1. Know who you owe

A short sale has to be approved by any company that has a mortgage or lien against your home. That includes your first, second, or even third mortgage lender, your home equity line lender; your homeowners or condominium association; and any contractors who’ve placed a lien on your home. Make a list and start talking to everyone early in the process. Ask what documents they’ll need from you.

2. Pick your short sale team

You’ll need to work with a team of short sale experts, including a real estate agent, real estate attorney, and your accountant. Look for agents and attorneys who advertise themselves as short sale experts.  There are special training classes and certifications for Realtors, such as Loss Mitigation Certified, and you should look for experienced and well-trained Realtors.  Interview at least three, and listen carefully for signs that they understand the complexities of the short sale process.

Agents should explain how they’ll arrive at a suggested price for your home. Ask them to show you a sample short-sale package or for an example of a prior short-sale success.

The attorney is a very important member of the short sale team, and you must choose an attorney who has successfully closed a number of properties.  You might ask for referrals to check with his clients about their experiences.

3. Get your documents ready

Gather the paperwork your creditors and mortgage lenders asked to see, like your listing agreement and a hardship letter explaining why you need to do a short sale. You’ll also need proof of what you earn and what you owe as well as copies of your federal income tax returns for the past two years.

4. Expect delays

Despite a federal rule saying banks participating in the federal government’s Making Home Affordable loan modification program must respond to short-sale offers within 10 days, it may take weeks or months for your lender to decide whether to allow you to sell your home in a short sale—and even longer if you must negotiate with more than one lender or lienholder.

Your lender and lienholders don’t have to agree to your proposed short sale. They can reject your terms or make a counter offer, which can create further delays.

5. Anticipate demands

Discuss with your short-sale team how you should respond to common short-sale demands from lenders. For example, are you willing to sign a promissory note agreeing to pay outstanding amounts after the sale is complete?

6. Know the tax implications

Any unpaid amount of your mortgage “forgiven” by your lender through a short sale may be considered income to you under federal tax rules. Ask your attorney or accountant whether you qualify to exclude that amount as income on your tax returns under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act. Also ask if you’ll be required to report amounts “forgiven” by other lienholders, if applicable.

7. Consider how the short sale will affect your credit and what you must pay

Ask whether your lender will report the short sale to credit-reporting agencies. Having a portion of your debt forgiven may negatively affect your credit score, but a short sale typically damages your score far less than a foreclosure or bankruptcy.  A short sale also puts you in control of the process.  A foreclosure make take years to complete and the bank is in control of this time frame.  Two home I knew about personally took over four years to finish the foreclosure process because the bank continued to make mistakes.  When you finish a short sale, you will be able to start to repair your credit immediately, and then you will be able to buy another home in a reasonable amount of time.

Ask you lawyer whether you’ll be responsible for paying back the lenders’ loss. If the lender says it will forgive any losses on the sale of your home, get that promise in writing.

When you are ready to evaluate whether a short sale is the right decision for you, contact several Realtors and begin to ask which one can give you the best guidelines.  Put the agony of this financial situation behind you.

The recently proposed Qualified Residential Mortgage rule, requiring 20 percent down payments, has spurred more in-depth studies on its potential effects.  This will definitely affect the real estate recovery.

Despite the economic troubles Americans have experienced, it is clear that a majority of people still believe in home ownership and the desire for home ownership as part of the “American Dream” is still consider a goal many people work toward.  Achieving that dream will be increasingly difficult for buyers if our government  requires  a 20 percent down payment.  That is why Realtors® are strongly urging regulators to go back to the drawing board on the proposed rule and find a better solution.

A little deeper digging reveals some important truths about jobless rate in New England.  The Bureau of Labor Statistics has alternative measures of labor under utilization.  U-6 is actually the unemployment number no one likes to talk about.  These are the carpenters, plumbers, and electricians who are self-employed and NEVER collected unemployment.  These are the small business people who have quietly gone out of business because they can no longer keep their doors open. 

But these people are STILL unemployed or very underemployed.  And they are not represented in the “official government” unemployment numbers.

THE “OFFICIAL RATE” is defined as U-3, total unemployed, as a percent of the civilian labor force (This is the definition used for the official unemployment rate that is quoted in the media).

THE TRUE RATE OF UNEMPLOYMENT is defined as U-6, total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

When we take a look at the numbers in New England, it gives us a very different picture than what the press and the government actually talks about.

            State                                        U-3                    U-6

           Connecticut                              9.2 %                  15.7%

           Massachusetts                         8.5%                   14.3%

           Maine                                           8.2 %                  15.2%

           New Hampshire                      6   %                    11.8%

            Rhode Island                          11.3%                 19.2%

            Vermont                                   6.2 %                  12.5%  

It looks like we have a long way to go before we will have the job increases we need, and quantitative easing may not be our answer.     Until we have a stable job market, the housing market and new construction will not recover to healthy levels.

According to Zillow.com, “November marked the 53rd consecutive month of home value declines, with the Zillow Home Value Index (ZHVI) falling 0.8% from October to November, and falling 5.1% year-over-year.”

Although the news on housing seems bad, we do have some bright spots in the economy.   According to Zillow Research, the economy is improving.  The improvement is expected to be slow, but job creation and consumer confidence are improving gradually, and this is good news for everyone.   

The improvement is expected to gradually increase “household formation and consumer confidence”.  But the housing market may still face greater declines due to “excess inventory of homes, high negative equity and foreclosure rates, and weakened demand due to elevated unemployment,” reported Zillow.com.  

If you have been waiting and watching this unfolding situation, take note.    Although no one can tell you with absolute certainty, the opportunity for buyers today is very favorable.  Now is the time to buy. 

The interest rates are still very good, but no one is expecting them to stay at this low rate indefinitely.  If you buy a home for $250,000 at a 5% interest, you would have to find the same house later for $205,000  price to qualify at the same mortgage payment if the interest rate went to 7%.   Affordability will go down significantly when interest rates move up.   

All things are coming together to provide first-time home buyers with a unique opportunity to grab their chance at the American Dream.  Home prices are trending at low levels.  Sellers are prepared to negotiate to move on to their next homes.  There is a good inventory of homes in many price ranges.    

A few things to consider:  Do you need a place to live?  (Rents are going up.)  Would you plan to stay in your home for at least a few of years? (Most buyers live in their home on average seven years).  Do you want to own a home of your own?  Have you saved some money for a down payment?

Remember that homeownership has many benefits including tax deductions, the opportunity to make your own creative changes to your home, the opportunity to plant your own garden to grow organic food, and future increase in equity when you sell your home some day.   

Appreciation may be slow in coming in the short term, but the National Association of Realtors reports that homeowners have between 31% and 46% higher net work over renters.  This will make a big difference in your future.  Now is the time to buy!

Home ownership has a significant impact on net worth, educational achievement, civic participation, health, and overall quality of life. And, home ownership helps create jobs—lots of them—right here at home.

Home Ownership matters…to people, to communities, and to America. Why?

Every additional 1,000 home sales this year over last year create 500 new private-sector jobs in the U.S.

Every home sale touches 80 occupations. America needs jobs, and a strong housing market can provide them.

Each purchase generates as much as $60,000 in economic activity.

The home ownership debate

Some who care about creating jobs also argue that home ownership may be overrated, and that we might be better off as a nation of renters—including some in the Obama Administration and Congress.

 If that’s of concern to you, follow the debate about federal government incentives to home ownership—the outcome of which will determine whether the average American can still get an affordable mortgage and whether home owners can continue to deduct their mortgage interest  as a benefit of home ownership. 

Owning your own home is not only beneficial to you; it also helps create jobs and stimulate the economy

• Read about the issues affecting you as a home owner right now:

Home ownership

It pays to support responsible home ownership.  Protect your home’s value and build stronger communities.

Mortgages

American home owners need affordable mortgages, REALTORS® say.    The president’s proposal for a new secondary mortgage market structure needs to ensure home owners have access to a constant source of reasonably priced home loans.

Losing Fannie Mae, Freddie Mac would increase mortgage interest rates, which will slow down the economic recovery.  Without government-supported mortgage programs from Fannie Mae, Freddie Mac, FHA, and VA, interest rates on home mortgages would rise by 2 percentage points.

Mortgage deduction

Mortgage Interest Deduction Vital to Housing Market    The mortgage deduction saves the average home owner thousands of dollars at tax time, supports home values at the community level, and helps American home buyers get into their first house.
 Deduct Mortgage Interest and Home Equity Loans   
Deducting mortgage interest, as well as interest on home equity loans and HELOCs, can save you money on taxes.

Published: February 11, 2011  House Logic