Outrage over legislation that would require appraisers to ignore distress sales in selecting comparable properties for appraised houses forced Maryland legislators to back down from the idea, though three other states are still considering the idea., including Nevada which is holding a hearing on the bill today.
Legislation in Maryland that would have prohibited the use of foreclosures and short sales as comparables in the development of an opinion of the value of residential real estate was withdrawn March 29 from further consideration, but legislators in Illinois, Nevada, and Missouri have all proposed separate bills that would exclude or restrict foreclosure sales from being used as comparisons to determine the value of homes around them.
The Missouri legislation, known as House Bill 292, would prohibit appraisers from using a property that has been sold at a foreclosure sale as a comparable. Similar to the Missouri proposal, the Illinois legislation would prohibit appraisers for the next five years from using as a comparable sale “a residential property that was sold at a judicial sale at any time within 12 months.”
The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained in the Maryland legislation are somewhat broader and include any property that was sold under “duress or unusual circumstances, such as a foreclosure or short sale.”
According to the Appraisal Institute, “Elimination of foreclosures and short sales as comparables would result in an artificial market and would mislead lenders as to the true value of their mortgage collateral.”
The legislation would permanently skew appraised values for property, impacting purchased and refinance mortgages as well as the marketability of properties whose values would become artificially inflated as a result.
Some home builders and real estate agents support the legislation, which they hope would prevent the erosion of property values caused by foreclosures, which are prices at a 20 to 40 percent discount in some markets, creating a two-tiered marketplace. Nationally distressed properties accounted for about 40 percent of all existing home sales last year.
The National Association of Realtors says nearly one in four of its members has reported clients losing a sale due to botched appraisals. The National Association of Home Builders, meanwhile, said low appraisals were sinking a quarter of all new home sales and argues it’s not fair to compare distressed properties to brand-new homes.
Should states outlaw using foreclosures as comps, widespread confusion could result because Federal rules still require appraisers to consider all sales for appraisals, including short sales and other distressed sales.
“In some markets, there are so many distressed sales that they are the market and must be considered. When there is a glut of distress sales in the marketplace, and those properties are truly comparable to the subject, it would be misleading not to use them as part, or in some cases all, of the basis for a value conclusion,” said a representative of the Appraisal Institute.