A while back I read a story about people who have won the lottery twice and three times. Some play the same numbers. Some invested tens of thousands of dollars. One couple won twice in one day. Could you imagine? Imagine winning just once, then having your numbers called the second time, only to have them put back because the person reading the numbers decided the prize should go to someone who had never won before.
I don't know anyone who would feel good about that. The reason is simple: it's not fair and it's not just. The person who reads lottery numbers is a conduit, a messenger who is responsible only for reporting the numbers that have been randomly selected. Even if that person's mother, boss, or even the President of the United States declared a redraw from a pool of “worthier” candidates, it wouldn't be fair. Actually, that would be even more suspect, particularly if the person mandating the redraw stood to directly benefit from the outcome.
My industry deals with the same basic issue everyday. We don't draw lottery numbers, but we do try to draw conclusions based on the fairest representation of data. We can no more pick and choose our comps than a lottery spokesperson can choose the winning numbers.
Listen, I know it's not pleasant for lenders to get a lower value than they're expecting on an appraisal report. I understand what it's like to get these kinds of unexpected surprises. You arrive at your office to find that the deal you've been working on for the past month is dead because of an appraisal value. The borrower told you there was a neighborhood sale 5 months ago for $300,000. All you need is $280,000. You decide to see what went “wrong,” and that's when you find the issue. You see the $300,000 sale that the borrower was talking about. Then you see the comps that the appraiser used: one for $250,000, another for $255,000 – both foreclosures. Of course you're upset. Of all the sales on the market, why did the appraiser have to use foreclosures?
Let me explain. To an appraiser, a sale is a sale. It doesn't mater if it's a regular sale, short sale, foreclosure or a fire sale. The appraiser is trying to figure out what's going on in the market area and which properties are most similar to that particular property. He or she is going to look at recent similar sales to do that. If the subject property is like the foreclosures that sold, then the foreclosures will be used as comps. If it's not, then they won't. It's as simple as that. For example, for the most part, a foreclosure wouldn't be considered for a new, ultra modern, unique home in great condition. If you have an older home that hasn't been renovated in 20 years, in a medium income area, however, it's more likely foreclosures could be the most similar and most reflective comparable sales. That $300,000 sale wasn't as similar to the subject as the foreclosures. Period.
Appraisers see homes and ask, "If I had to buy a house just like the subject, today, in this market area, which other houses would I look at?" The MLS provides this information via photos and property information. The sales price and other information don't matter as much as one might think. Most appraisers look at photos first and sale prices second, because starting without the end in mind is the most objective method. A foreclosure typically means you get a property "as is." But that doesn't necessarily mean those homes are going to be bad or that lenders are giving them away. Discounts occur when there are a ton of foreclosures in the market area, because lenders have to drop prices to unload properties. Lenders don't have years to wait. They want properties off their books as soon as possible. The difference between $250,000 and $240,000 isn't that big in comparison two years of upkeep on a vacant home.
The next time you see an appraisal that uses REO or other sales, save yourself some aggravation and remember that foreclosures are legitimate part of the market. A 30-minute review and a few minutes on Zillow.com can't match the work of an appraiser who lives in the market area, has years of training, physically inspected the property, and knows the market area inside and out – no more than a few minutes on a lender's website can tell borrowers what their exact rates and total fees will be. No one in this business – not originators, underwriters, appraisers or anyone else – was hired to tell folks what they want to hear. We've got a profession to uphold, and it's about time we started working together to do just that.
