Foreclosures And Short Sales Now Count In Value Calculations
For many months now, I have been wondering if real estate agents should include short sales and foreclosures in the Comparative Market Analysis (CMA) calculations done to determine the value of real estate being sold.
I think we may have been given that answer today, according to a St. Petersburg Times article written by Will Van Sant.
Van Sant has pointed out that many tax appraisers are now going to include short sales and foreclosures in their analysis of value for tax purposes.
This decision is a very big deal!
The reason to start including these sales is that short sales and foreclosures are now part of the normal operations of the real estate market and, in Pinellas County for example, account for about 30-percent of real estate sales. Such a high percentage of distress sales may be re-defining what the term "market value" really means and how it is calculated. That's what makes it such a big deal.
If you are a property owner in an area where there have been a lot of distress sales, this may mean that your property taxes will drop in a year or so -- good news for many struggling homeowners.
But if real estate agents and bank appraisers start using distress sales to determine market value for property as is done in a CMA, using distress sales will likely mean that the value of residential and some commercial real estate will fall even farther than it has in the past two years.
The reason? The banks and mortgage companies who sell foreclosed properties greatly reduce the value of the properties in order to get it off their books. The discounted value of those homes is now going to be used to determine the value of your home, even if you are not trying to sell short or are in danger of foreclosure. This will mean your property value is very likely to drop.
Real estate agents and appraisers have historically not included short sales and foreclosures when calculating property value. The reason? Such sales did not have much of an impact on the marketplace. According to the Times, in September 2007 only 6 percent of sales were distress sales; in September 2006 only 1 percent. Such figures were removed from value consideration since they were not "arms length transactions" and had little if any impact on the overall market value.
Today, with roughly one transaction in three being a distress sale, many real estate agents and property appraisers believe they must include distress sales since they have a huge impact on overall property value. How much of an impact? According to real estate consultant Peter K. Murphy with Home Encounter in Ybor City, banks last month (October) were selling foreclosed homes for an average of 60-percent of market value.
Why are banks doing this? Simple. Banks want money. Banks do not want real estate. So, rather than hold on to a depreciating asset (the house), they are willing to sell them on the market for an average of 60-cents on the dollar. Since one sale in three is a distress sales, and since the value of your house is now going to include distressed sales, what do you think will happen to the value of your property? Of course, it's going to go down.
Here's the other thing to consider. Assume you find a buyer for your house at your current price. If the buyer is going to have a mortgage, the mortgage company is going to have your home appraised to make sure it is worth the amount of the mortgage. The bank appraiser is probably going to use those distressed sales in his analysis, thus driving down the mortgage value of your property. If the bank appraiser comes in with a figure that is lower than your contract price, the bank won't give the buyer the mortgage. No mortgage means no sale in most cases. So, it does not make any sense for sellers to keep holding on to high prices due to the new appraisal techniques now being used.
Who will be hurt the most by this change in the way values are determined? I can only guess, but I would think those who will feel this the most are ...
I think we may have been given that answer today, according to a St. Petersburg Times article written by Will Van Sant.
Van Sant has pointed out that many tax appraisers are now going to include short sales and foreclosures in their analysis of value for tax purposes.
This decision is a very big deal!
The reason to start including these sales is that short sales and foreclosures are now part of the normal operations of the real estate market and, in Pinellas County for example, account for about 30-percent of real estate sales. Such a high percentage of distress sales may be re-defining what the term "market value" really means and how it is calculated. That's what makes it such a big deal.
If you are a property owner in an area where there have been a lot of distress sales, this may mean that your property taxes will drop in a year or so -- good news for many struggling homeowners.
But if real estate agents and bank appraisers start using distress sales to determine market value for property as is done in a CMA, using distress sales will likely mean that the value of residential and some commercial real estate will fall even farther than it has in the past two years.
The reason? The banks and mortgage companies who sell foreclosed properties greatly reduce the value of the properties in order to get it off their books. The discounted value of those homes is now going to be used to determine the value of your home, even if you are not trying to sell short or are in danger of foreclosure. This will mean your property value is very likely to drop.
Real estate agents and appraisers have historically not included short sales and foreclosures when calculating property value. The reason? Such sales did not have much of an impact on the marketplace. According to the Times, in September 2007 only 6 percent of sales were distress sales; in September 2006 only 1 percent. Such figures were removed from value consideration since they were not "arms length transactions" and had little if any impact on the overall market value.
Today, with roughly one transaction in three being a distress sale, many real estate agents and property appraisers believe they must include distress sales since they have a huge impact on overall property value. How much of an impact? According to real estate consultant Peter K. Murphy with Home Encounter in Ybor City, banks last month (October) were selling foreclosed homes for an average of 60-percent of market value.
Why are banks doing this? Simple. Banks want money. Banks do not want real estate. So, rather than hold on to a depreciating asset (the house), they are willing to sell them on the market for an average of 60-cents on the dollar. Since one sale in three is a distress sales, and since the value of your house is now going to include distressed sales, what do you think will happen to the value of your property? Of course, it's going to go down.
Here's the other thing to consider. Assume you find a buyer for your house at your current price. If the buyer is going to have a mortgage, the mortgage company is going to have your home appraised to make sure it is worth the amount of the mortgage. The bank appraiser is probably going to use those distressed sales in his analysis, thus driving down the mortgage value of your property. If the bank appraiser comes in with a figure that is lower than your contract price, the bank won't give the buyer the mortgage. No mortgage means no sale in most cases. So, it does not make any sense for sellers to keep holding on to high prices due to the new appraisal techniques now being used.
Who will be hurt the most by this change in the way values are determined? I can only guess, but I would think those who will feel this the most are ...
- Sellers of single family homes in areas that have a high percentage of short sales and foreclosures. This would include recently developed communities in New Tampa and southern Hillsborough County.
- Sellers of condominiums where speculative buying and selling activity were rampant during the 2004-2006 time frame; that would include the Gulf beaches and downtown St. Petersburg areas which saw a fast spike in prices followed by a troubling lack of sales.
- Sellers of older properties that were bought and extensively remodeled for the purpose of "flipping" the house for a profit. This was common all over the Tampa Bay area. It may now be that those houses are simply over-improved and over-priced pieces of real estate whose value is going to take a big hit once distress sales are included in their value calculation for both marketing and mortgage purposes.
Who is probably not going to be bothered too much by the inclusion of distress properties in value calculations?
- Sellers of condominiums in retirement communities. Many of these residents own their units free-and-clear and are not troubled with short sales and foreclosures because so few of them have a mortgage. With fewer mortgaged properties in their immediate communities, sellers are not heavily impacted by bank-forced sales driving down prices.
- Sellers who own property in areas where distress sales are not common. If there are not many distress sales in an area, such properties will not be included in the CMA and will have minimal if any direct impact on values.
Given this new set of circumstances, what should sellers do if they have property on the market today?
My initial suggestion is that sellers should contact their real estate agent, or call in a professional property appraiser, and ask for a new value analysis which includes the latest comparable sales in the area. Make sure the agent uses all appropriate short sales and foreclosures in the CMA. This will give a more accurate valuation of property in today's economic climate. If the property has been on the market for some time without a price adjustment, and the property is in an area with a lot of short sales and foreclosures, sellers should be prepared for some shocking re-evaluations of property value thanks to the inclusion of distress sales.
For more information about real estate in the Tampa Bay area, please visit my website at http://www.thestpeterealestatesite.com/.
-30-
posted by Terry Ward at 3:49 AM
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