The ongoing discussion/thread regarding removing foreclosures from appraisals (See the comments under Nevada moves to ban foreclosures from appraisals) got me thinking: 1) is there an inherent difference in value between the different types of sales; and 2) if so, how great a difference?
As a start to answering these questions, I pulled 2011’s first quarter sales (1,250 units) and looked at the median and average sold price per square foot broken out by sales type. Here’s what I found:
| sale type |
units sold | median sales price | median sold $/sq.ft. |
average sold $/sq.ft. |
| bank-owned | 477 | $140,000 | $83.54 | $84.83 |
| short sales | 407 | $157,000 | $91.95 | $93.24 |
| non-distressed | 346 | $216,027 | $115.25 | $108.33 |
| 2011 Q1 total |
1,250 | $160,000 | $92.15 | $96.18 |
Certainly, some dramatic differences in the price per square foot can be observed. For example, the difference in median sold price per square foot for bank-owned (foreclosure) properties, at $83.54, and non-distressed sales, at $115.25, is a whopping $31.71. That’s huge, folks!
Just to lend some perspective to such a difference, the average size of the houses sold in Q1 2011 was 1,972-sq.ft. Multiplying that size by the $31.71 difference above yields a price differential of $62,532.12. The median size of the houses sold in Q1 2011 was 1,769-sq.ft. Multiplying that size by the $31.71 difference above yields a price differential of $56,094.99. Either number is substantial.
Now do these differences warrant excluding certain types of properties from appraisals? I suppose that’s up to the legislators to decide.
Note: The median home price data above covers the cities of Reno, Nevada and Sparks, Nevada [NNRMLS Area #100]. Residential data includes Site/Stick Built properties only. Data excludes Condo/Townhouse, Manufactured/Modular and Shared Ownership properties. Data courtesy of the Northern Nevada Regional MLS – April 2011. Note: This information is deemed reliable, but not guaranteed.
Tom Joad
According to the just released stats for March, 71% of all sales are “distressed”. We should just pretend that 71% of everything that sold really didn’t sell, and base appraisals only on the 29% of sales that were not distressed?
Come on, this gets more bizarre by the minute.
Rubiconer
Guy are you selling Denial Pills?
Are you suggesting that appraisals ought to be based on a median per sq. ft. of $115.25, when in fact the median per sq. ft. is $92.15?
Really?
How about we just say that appraisals only ought to be based upon the most recent selling prices of non distressed houses with lake front locations at Lake Tahoe?
Once we start cherry picking the data set, where do we stop?
bob_c
The ppsf of listings and sales has glaringly fallen and your data confirms this. Too many homes and too many big homes is the only thing I will cherry pick from this data. Distressed sales inherently have a deferred maintenance discount, but in these lean times heating/maintaining a large home becomes quite a larger part of the family budget. $500/month for heat ? Twice the amount of repairs ? Twice the amount of capital outlays for roof/remodel needs? twice the cleaning area? usually a larger property tax bill. Higher insurance costs. Lots of costs living in the 3300sf versus a 1650sf home.
What do you need? The rest of those square feet you purchase can be argued to be a liability rather than an asset. I speak from first hand knowledge.
GreenNV
One more data point is the $/SF of the 3rd party sales of Trustee’s Deeds. These are the 4 from this week, $65 psf average:
3rd party sales, $ owing, $ opening bid, $ sold, SF, $/SF:
1245 Bodega 299/97/125 1715/$73
6750 Runnymede 344/150/150 1772/$85
310 Galleron 234/64/64 1203/$53
4570 Sierra Madre 272/95/105 2128/$49
BillB
The purpose of an appraisal is to protect the lender from loss of principal.
Since the only way a lender could lose principal is if the house is a short sale or a foreclosure, why in the world isn’t it appropriate for lenders to use short sale or foreclosure comps?!? Indeed one could very credibly argue that lenders should be required to *only* use distressed comps and ignore non-distressed comps because non-distressed comps will realistically never come into play in a short sale of foreclosure (as your ppsf statistics so starkly demonstrate).
It is entirely inappropriate for the legislature to effectively try to dictate weaker underwriting standards to lenders. This is exactly what caused Fannie and Freddie’s underwriting standards to decline so much in the last 15 years and was thus a major contributor to the entire housing bubble and bust.
Legislators weakening underwriting standards to please realtors, mortgage brokers, and home buyers at the expense of banks and savers will only lead to a re-run of the entire 2008 financial crisis.
Hasn’t anyone learned anything from the past few years?!?
Hooten
Guy,
My cousin lives in one of those South Meadows look-a-like neighborhoods. On his street, the house to his immediate right is a foreclosure, the two houses directly across the street are foreclosures, the house two down from his to the left is a foreclosure and the house that adjoins his directly in the rear is a foreclosure. Suppose my cousin were to put his house on the market. Are you suggesting that when the appraisal of his house is done, the appraiser ought to ignore the five foreclosures within 30 yards of his house and appraise it pretending those foreclosures never happened?
Guy, how absurd is that?
I await your response.
Skippy
If this law passes, isn’t there a chance that some lenders won’t lend in Nevada anymore? If the loans are based on inaccurate information, why would anyone in their right mind continue to lend here?
Steve Herschbach
Wow, what’s up with you people. I did not read Guy’s post as advocating for the proposed law. Just laid out some figures and said it is up to the legislature, which it is.
But I agree the whole idea is stupid. Something is only worth what it will sell for, and that is what an appraisal is supposed to tell you.
Guy Johnson
Thank you, Steve. You are correct, I am not advocating the proposed law.
Hooten, Rubiconer, et al, I am not suggesting that foreclosures be ignored. The purpose of the exercise was to show the differences between distressed and non-distressed properties.
inthebusiness
I found it very interesting…thank you, Guy.
Martin
This topic has been somewhat of a rarity for the RRB. There is almost 100% agreement that this is a very stupid idea.
billddrummer
I don’t have a dog in the hunt and even I think it’s a stupid idea.
Sully
Guy, you’re point is made in comparing sales. However, I would compare short sales to non-distressed as opposed to foreclosures. Reason being the foreclosures require some work whereas the short sales are generally move in ready.
Here are the things I have noticed in all the foreclosures I have looked at (not all items in same house):
Landscaping needs work (grass, plants, irrigation value repair,etc); missing appliances (one had garbage disposal removed),doors,window coverings,toilet seats, light fixtures,mirrors,sink faucets. Interior damage like holes in sheet rock or deep gouges in hardwood floors.
Short sales usually have someone living in them and the house is fairly well maintained, thus giving a bit better comparison to non-distressed condition.
Bobo
Are your non-distressed figures just resales, or new homes also? New homes are presumably selling at a higher ppsf.
Guy Johnson
Bobo, if a new home sale was recorded on our MLS then my numbers picked it up. Some new home developments place their available inventory on the MLS; some do not.