Are "Foreclosues" Considered True Comparables?

It depends on who you ask. Simply because a property sells for $5.00 does not make it a comparable. Often a duress sale doesn’t accurately reflect true market conditions, such as a foreclosure, short sale, estate settlement, tax sale, divorce, condemnation of property, or other involuntary sale conditions.Professional appraisers use a standard called “arm’s length.” To qualify, the buyer or seller must not be related to each other or have common interests – they have each other at “arm’s length” – that establish a fair market value. In a “non-arm’s length” transaction, the relation-ship between the parties may cause one or the other to accept less than they are entitled to or pay more than fair market value. Foreclosures are often considered “non-arm’s length” transactions by appraisers and may not be considered a true comparable. On the other hand, foreclosures do impact pricing. Some researchers report as much as a 10% discount in a property’s value if a foreclosure is on the market within 250 yards. Although not a true comparable, foreclosures must be factored into establishing the right price for a property in the “Real Estate World.”

When it sells, it will be looked at as a comp. Now, that being said, IF the appraiser (or agent) knows it was a foreclosure, and IF it is an anomaly sale, in other words it sold for $300k and all the others sold at $350K, it may not hurt you too bad. But, unfortunately, right now, with sales so slow it may be the ONLY comp. When it sells.

Foreclosures and short sales should not be looked as a comp, but in a foreclosure driven market they will determin the selling area values. That is why when a lender requests a BPO they always say they do not want other REO properties used as comps. In part because they don’t want to face the reality that they are going to lose money when the property does get sold. For some odd reason the lenders think their properties are worth just as much as a non-foreclosures including all the damage and neglect that comes with a foreclosure. With this in turn it also hurts the sellers of non-foreclosure properties by driving down the values. Non-foreclosure propeties end up sitting on the market a lot longer and buyers are looking at the cheaper homes which happen to be the foreclosures. Most buyers now can get an FHA 203k loan that well get them into the house and have the additional money to do any repairs and still come out cheaper than if they bought the non-foreclsure home. It is my opinion that a foreclosure should not be used as a comp, but they do affect area values in a foreclosure driven area. Several BPO requesting lenders are now allowing REOs as comps as long as one comp in the listing and selling is not a foreclosure.