For those buying or selling a house, you’ll be presented with one opinion or another as to what the home should be appraised at – this is of course based on comparable homes (known as “comps).
Legislation tussles in four states are a reminder that comparable sales are a matter of opinion, whether in the form of a formal appraisal or a real estate agent’s ballpark estimate. What’s included or omitted from consideration can swing a home’s apparent value in either direction.
Consider foreclosures, which typically sell for a discount, compared to ordinary sales. Should they (and short sales, wherein the bank agrees to sell a home for less than the value of its mortgage balance) be fair game as comps when figuring out the value of a similar home down the street?
One point of view says no. Bills in state legislatures this spring set out to prohibit appraisers from using foreclosures and short sales as comps, setting off a lobbying tug-of-war between appraisers and the real estate industry.
Supporters of the bills contended that “distressed” debt sales — foreclosures and short sales –- historically don’t represent the standard marketplace and shouldn’t be used for home appraisals. They also distort the market and unfairly bring down average values, thus sinking sales and torpedoing homeowners’ efforts to refinance when a property fails to appraise.
But critics of the would-be laws said a comp is a comp is a comp –- to metaphorically quote Gertrude Stein. A distress sale by nature unnaturally inflates the true value of the property.
This article is a guest post from MortgageWiki.org.