These are all very good points, and points well-made, especially from a real estate appraiser’s perspective.

What many buyers do not understand is that the value of any property begins with the site value. Land, theoretically does not depreciate. Improvements do. There are some buyers who are in the business of profiting from short sales, and understand that costs to cure, combined with sale price, and entrepreneurial incentive all have to be factored in. There are others who just want to buy an affordable home, sometimes, with the good intention of earning sweat equity as they go. Still, this does not mean that because they got a property on short sale, that they walked into the closing wearing a ski mask. When all is said and done, often times, a foreclosed property, brought back to market standard, as you state, ultimately winds up at market value, anyway. Sometimes over market value, in cases where This Old House becomes This Damned House.

As for foreclosures affecting market value, I have found that it depends on the market. Obviously, in markets where there are a considerable amount of foreclosed properties, and a considerable amount of similar properties currently with petitions to foreclose filed, it leads to increases the supply of possibly comparable properties at distressed prices. Similar competing properties may have to wait for these properties to be absorbed before stability returns to that category of property.

However, it is critical, with the emphasis on critical, that when it comes time for the appraisal to be done, that the appraiser understand the true effect of foreclosures in the category, and the condition of the foreclosed properties, when making adjustments as compared to the subject property. To not do so can lead to an undervaluation of the subject property, as too much weight was placed on the sale prices and supply of the short sale properties alone, and not on how these properties truly compared to better-maintained, move-in condition properties competing in a more normal marketplace, where buyer and seller are informed, typically motivated, and acting in their own best interests. This is also why the appraiser must be very careful in selection of comparable sales, as the buyers of foreclosed properties and the buyers of non-distressed properties are not always one and the same, especially when there is clear market evidence in arm’s length transactions to support this difference in market participants. When that is the case, it is important that the appraiser clarify these findings in the 1004 Market Conditions Addendum, such that the lender is clear on the foreclosure situation, but also that, given the market conditions for arm’s length transactions of non-distressed properties, the subject is not overvalued, but valued correctly, based on market evidence found within the sufficient number of sales of non-distressed properties.

I say this because I think it is important for Realtors to make note of, to be aware of, and to discuss with the appraiser when it is time to value a property; not to influence value, but to inform as to differences between what appear to be competing properites. This is not leading an appraiser to a biased opinion of value. This is not pressuring an appraiser to “make a particular value.” This is arming the appraiser with possible market data and knowledge that leads to a more credible valuation of the subject property, helping the appraiser to avoid an error in omission by not having key market knowledge on certain market conditions or certain properties being considered for use as comparable sales or listings.

There have been cases in some markets where Realtor knowledge from having shown comparable properties, from knowing the properties, having been in and out of them a few times, from knowing subtle differences between neighborhoods and locations, or from knowing the selling situation, have been invaluable in arriving at correct adjustments and more accurate valuations of non-distressed properties priced at, and under agreement for, what is, in effect, market value.

Bottom line, just because there are foreclosures in a neighborhood doesn’t neccesarily mean that a non-foreclosed property is not a better value, or worth the higher asking price, as you state. And sometimes, it can be the Realtor, willing to accurately inform, not sway, the appraiser, who can make the difference between a correct market valuation and an undervaluation. Which as we both know, can ultimately make or break the deal.

Gerry Hailer