Ask Henry

Adjustments for REOs and Short Sales

Hi H2:
Still a fan of your column/blog after all these years!

My question is: how do we adjust for bank sales and short sales when the only comparables available are in these two categories? In the past, we were able to find similar comps that were not REOs or short sales -- but that has now become impossible in some areas where I practice.

Larry Kowitt
Real Estate Appraiser, New Jersey

Dear Larry,

This depends upon what is happening in the subject property's market area for houses similar to the subject property. If the market area is flooded with short sales and bank sales, a prudent buyer is not going to buy the subject house unless it is priced competitively with those sales. Therefore, you should be using bank sales (REOs) and short sales as comparables and an adjustment may not be needed. It is more complicated when bank sales and short sales make up only a portion of the market. A prudent buyer would try to buy an REO or short sale if they were available on the effective date of the appraisal. Therefore, you would have to consider competitive listings. Ask yourself this question: "If the subject property were not available for sale on the effective date of the appraisal, what would a potential buyer of that property accept from what is available?" What they would buy as a substitute basically defines the comparables, and determines the value of the subject property.