The Call for Appraisals to Exclude Short Sales and Foreclosures

There has been a great deal more posted recently on the Internet about forcing appraisers to exclude short sales and foreclosure sales from their appraisal reports.  The latest arguement for appraisal manipulation is that short sales and foreclosure sales are not exposed to the market with sufficient time to garner the best price they could have, and thus this lack of exposure time is the reason that their sales prices are lower than they should have been.

It's not true, short sales are usually exposed to the market before they are sold.  Those properties that are snapped up by buyers looking for a steal often find that the bank, FHA or other note hold or lenders wants an appraisal report before they accept the deal and the price will be adjusted to market value before it is closed. 

The question is, what happens if the powers that be do change the rules on appraisers?  Changing appraisal methods by forcing an appraiser to ignore short sales and REO sales is not going to solve a lot of problems, its just going to create others.  What will in fact happen if short sales and foreclosures are not considered by appraisers in their reports is that one home buyer will pay $ 100k for a home, for example, and the exact same home next door will be sold by the bank a day later for $ 75k.  

How can that happen?  It's easy, when the appraiser ignores short sales and foreclosures he's not going to even be looking at those sales or pending sales.  He's going to ignore the fact that the bank sold three homes on the block for $ 75k, since they were short-sales, and only look for the private-party sales that likely had higher prices. 

Banks sell their homes, they don't like having a large "inventory," and many of them don't care if they have to take a large discount to get them off the books.  If you want to solve the falling price problems in the market stop the banks from taking discounts. 

If appraisers ignore short sales and foreclosure sales who benefits?  Not the general public who is supposed to be protected by licensed appraisers, they will get robbed.  Banks will not stop trying to dump their inventory.  You can't change the direction of the market by ignoring the fact that properties are being dumped into it.          

Existing, private-party homeowners who sell their homes above their actual value would benefit.  Agents of course would benefit, they could get properties sold that couldn't be sold before because of the inflated prices.  Their would be lots of activity until buyers figure out that they paid more than they should have.  Then the music will stop again.

I don't know of any appraiser who will want to be involved if the rules change.  The sales would all be flawed and would likely all end up in a court suit.  If you are an appraiser and you ignored the basic economic principals that appraisal methodology is based upon, I can't imagine that any excuse that you use is going to protect you from the wrath of home buyers who figure out that they paid way in excess of market value. 

Article source: http://www.appraisalarticles.com/General-Appraisal-Articles/3004-The-Call-for-Appraisals-to-Exclude-Short-Sales-and-Foreclosures.html