Should Foreclosures Be Usable in Appraisal Values?

Currently 3 states, Illinois, Nevada, and Missouri, are proposing legislation that would completely ban all foreclosures from being usable by appraisers when they attempt to determine the values of homes in a neighborhood. 

Why would this legislation be good?  Well, first off the prices at which foreclosures are selling has been acting as a dead weight anchor on housing prices for the last 3-4 years.  Foreclosures regularly sell for 10-20% less than the average sales price of non foreclosure homes in similar condition in the same neighborhood.  Banks need to get these properties off their books to free back up their capital and lower their carrying charges (cost accumulated on a home that you are holding for no purpose) so they try to price them low in order to get offers faster.  Typically, foreclosures are not in good shape as either the previous owner stopped caring for the home when their money ran out, so they can sell for even lower than that 20% below market value when they need a lot of work. Once a foreclosure is sold at one of these much lower price levels, it becomes a “comp” which is Real-Estate-ese for a comparable home that is used to help determine other homes values. 

If an appraiser uses a foreclosure as part of their selection of “Comps” it is going to reflect negatively on the value of those other regular sale homes that are in better condition, often pulling those home’s values down in the eyes of the appraiser.  If the appraiser decides that the foreclosure lowers the value too much, they can “under appraise” the home, or give it a value lower than the sales price.  This usually results in the sale of that home falling apart.  If the sale does go through at the lower price, that reduced value on the regular sale is now a “comp” too, meaning that all other regular sales are reduced to that level for future sales as well.

Under the current rules of appraising it isn’t considered a bad thing for an appraiser to under appraise a home (only if they over appraise a home do they usually get criticised for their appraisals by the banks/review boards that hire them), so if given the option, most appraisers will continue to use foreclosures in their comps which will continue to hurt values of homes for the foreseeable future.

If it is made illegal to use foreclosures in appraisals there would at least be one less factor exerting negative pressure in our property values, meaning that values of homes would function more as a result of supply and demand like they are supposed to again.  It will still be hard to get an appraiser to agree with a purchase price that would show an increase in value (even if it is justified), but at least it won’t give them as much of an excuse to push the values down more. 

The negatives on doing this…I really can’t think of any…in fact I would go a step further if I was proposing the bill and put Short Sales (pre-foreclosure sales) on the list of types of sales to ban from being used as comps as well! They usually are selling for about the same price range as foreclosures these days and cause the same problems, so why only eliminate half the issue? 

Will it happen in any of these states?  Who knows, but its a good idea if you actually believe in protecting the values of homes in a way that makes total sense and harms no-one. 

Maryland, my home state, had proposed similar legislation, but decided instead to debate making trans-sexuals a protected class in Maryland this past week, so they removed this bill from the dockets (I wish that this was a joke, but yes, debating cross dresser and cross gender issues was more important to MD’s legislature this past week than dealing with the economy and real estate…not that those people don’t deserve rights, but was it really the right order to be dealing with these issues in? Moving gets tempting on days like this…)

For the source article related to this subject, go to http://www.dsnews.com/articles/three-states-move-to-ban-foreclosure-sales-from-appraisal-values-2011-03-30

Keep Dreaming!

BofA Making Changes…Good and Bad

Over the past several weeks there has been a good amount of news coming from sources inside Bank of America on things that are going on within their company.  Some of this news is really good, and some could be bad if you have a loan with them or that is serviced by them already. 

Election Results and Real Estate

Well, with all of the politicians being too busy campaigning to do anything either useful or damaging related to real estate in this last week it has been a slow week news wise for my subject matter.  With a lack of any real news to share at the moment, I’m going to take a shot at doing what the rest of the blogosphere usually does, wildly prognosticating about the future with nothing more than my own opinons as the basis!  For today, I will attempt to gaze into the crystal ball in front of me (no wait that’s my monitor glowing) and see if I can predict what this past Tuesday’s election results are going to mean for our real estate market over the next two years.

Support Faster Short Sale Resolutions: CONTACT YOUR CONGRESSPERSON!

So we finally see a piece of bi-partisan legislature we should all get behind!

This week the house had proposed HR 6133, a bill that would require all lenders to get an answer to a prospective short sale seller within 45 days of the application being submitted.  Considering that this time is extremely reasonable to get things done, and that some banks are taking as much as 6 months to respond right now, this could do nothing but help our market.  Due to the slow rate of bank responses on short sales, less than 20% of short sale contracts are reaching closing nation wide.  Either buyers are becoming impatient, or the sellers are being foreclosed on before they get an answer on their short sale offer.  Either way, that buyer was taken off the market for months while waiting rather than being able to bolster our market. 
If fewer sellers were forced to go to foreclosure (where banks usually lose more money than they do on a short sale) and more buyers were able to get the homes of their choice (or at least get an answer faster) it should help our market to reduce some of the overhanging distressed inventory that it has right now.  Since the distressed inventory is the primary thing pulling prices down right now, any reduction in that would do wonders towards bringing us to a lasting and meaningful recovery!

As my title says, PLEASE contact your congressperson and encourage them to pass HR 6133, and soon.  I know if my district’s incumbent wants my vote in November than this had better be passed with their affirmative vote attached to it!  Let them know if you feel the same way.