How does a Short Sale Effect Value
April 20, 2008 No Comments
One of the requirements of being a licensed agent is to successfully complete various continuing education classes during each year. Last fall I attended a class on “Understanding Appraisals”. The instructor for this class is an Atlanta Appraiser by the name of Scott Murphy. I found Scott to be extremely knowledgeable and he was more than helpful for the agents taking the class. Taking into account Scott’s experience and expertise, I requested his insight on the effects of a short sale on appraised values from an appraiser’s viewpoint. The following is Scott’s reply:
The effect on the market due to short sales is yet to be seen. Short sales are relatively new to the market. Many short sales will go to investors who know how to manage the complex and time consuming process. They will work the system to obtain the property significantly below market. They in turn will relist and sell the house at market value, much the same as the foreclosure process. These sales will hopefully self correct themselves. The sales that will be most damaging to the market are those which sell to owner occupants slightly below market value with full market exposure.
The true test to the validity of the sale and to determine if the sale is a true arms length sale would be its exposure to the market. Foreclosure sales are generally discarded because a lack of exposure to the market or they are significantly inferior in condition to other homes in the neighborhood. Short sales, on the other hand, are typically in similar condition to other homes in the neighborhood. If the home is multiple listed for a reasonable amount of time (IE: 30 days or more) it is then thought to have been adequately exposed to the market and may very well be an arm’s length sale. The effect these sales will have on the market will be determined by the exposure and the number of them in a given neighborhood. Most neighborhoods can support 1-2 short or distressed sales without altering values. When the number of short of distressed sales exceeds the number of arm’s length sales values will significantly decrease.
I want to thank Scott for taking the time to share his insight. His answer has brought up an even more thought provoking question, Are short sales in any way responsible for the declining markets as viewed by the various mortgage lenders? If so would they not be like a double edged sword, they cut the losses of the lender by foregoing a foreclosure but create a more difficult lending environment for purchasers because entire market areas are becoming classified as declining markets.
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