I am sure that you have found as an appraiser that there are times when market data leads you to a conclusion that you did not anticipate.  At times the tried and true methods provide you with a basis for forming a value opinion but when you have completed that analysis you just don't believe where the data is leading you.  These are the times that your results fail your "reasonableness" standard, and you have to take a closer look.

Questioning my results seems to happen to me more often today when appraising Las Vegas commercial real property than at any time in the recent past.  Why?  Because the data is heavily affected by foreclosures, REO sales and short-sales.  There have been quarters in the Las Vegas market in which the sales of some property types (like sales in the vacant land and office market) have included over 50% "foreclosure affected" properties.

What appears to be a straight forward appraisal analysis becomes complicated by an all to familiar questions.  Do the sales reflect market conditions?  Are they reliable?  

I always consider the fact that someone, like a bank or a hard money lender, is relying on the report, and that it is likely that they are going to make a decision to loan or not loan their precious dollars based on my opinion.  So wrestling with the process and the results is important.

What I have discovered in the Las Vegas commercial real property market in 2011 is that it has become "two tiered."  It doesn't take a expert analyst to figure out that REO, short sales and distressed sales are changing hands at prices, on a unit basis (per square foot of gross building area or per acre), below unaffected private party sales.

You can explain the differences in the sales prices away by noting that the REO, short sales and distressed sales are not a "tier" at all but simply sales made with duress, they are "foreclosure affected" and thus command slightly less in the market.  You can call the difference a "foreclosure discount" if you like.  You could even call REO, short sales and distress sales "non-market" sales and not use them in your analysis at your own peril.  One thing you really don't want to do is to just ignore them.  

I have taken the time to look at REO, short sales and distressed sales in the various submarkets.  Generally, properties that fall into these categoies on average sell for less on a unit basis than unaffected private party sales.  Regardless of the reason, they do form a second "tier" in the market.  Do I consider them in my analyses?  Yes, but I always consider sales motivation, a forced sale or duress sale is expected to be lower.  Most banks and private lien-holders who acquire real property via foreclosure never expected that they would have to own it, and generally they will take a discounts to sell it.

The data suggests that the discount is not as substantial as many would expect.  Over the last several quarters data indicated that the difference between the average unit price paid for private party sales and that paid for REO / short sale / distressed sales fell between 4% and 18%.   

So when you consider the REO / short sale / distressed sales where is market value?  Not at the high end, you can't ignore the discounts in the Las Vegas market since they make up a large portion of the sales transacted.  Market value is not at the low end of the sales range either since we know that the  REO / short sales / distressed sales are biased by atypical motivations.  Of course, market value likely falls somewhere in between, and if we have taken the time as appraisers to consider all of the market activity we can't go too far wrong.

The .jpg attachment that follows this articles text provides a graph of non-foreclosure affected office sales (Red) and REO / short sale / distressed office sales (Blue) in the Las Vegas market between 2006 and 2011.  I am always interested in feedback.