Patrick Mackaronis: Foreclosures Affecting Real Estate Valuations

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Every month real estate foreclosures seem to either break a record or come very close. Foreclosures in the United States have become a very large problem for home sellers and more generally neighborhoods. Not only do they detract from the appearance of the block, but when on the market, they often sell for 20% to 30% less than similar homes not in foreclosure. The following is a guest post by Brabble CEO and Founder Patrick Mackaronis, based out of New York City.

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Appraisal Issue

Foreclosure sales are recorded like any other sale, so when appraiser pull up comparable properties, they automatically incorporate these depressed sales into their market value calculations. For sellers, that means most home appraisals in areas with an above average amount of foreclosures will reflect a lower market value.

To further exacerbate this problem, consider the fact that appraisals are backward looking. Appraisers rely on sales over the past six months to a year to value properties today. That means that the market could be getting better today, but homeowners will still have to contend with the depressed home sales from six months to a year ago.

Furthermore, this problem creates a cycle of depressed value. If prices were lower than they should have been six months ago and appraisers reflect those values in their reports today, home buyers will only be able to qualify for loans based on that data. Lower mortgage amounts and appraisals mean lower sale prices.

Potential Solutions to the Appraisal Problem

First and foremost, sellers should always take the time to walk through their home with the appraiser. They should be quick to point out the items that differentiate their home from the competition (e.g., new kitchen, remodeled basement, etc.). Don’t be shy about telling the appraiser the actual cost of the work, as he/she will probably add that to the value of the home.

The other solution is to have a thorough understanding of the neighborhood when talking to the appraiser. Be sure to let them know which house were foreclosure sales or sales in distress. Appraisers are often willing to incorporate feedback, since their goal is to most accurately reflect the value of the home. Feel free to communicate this information to potential buyers as well. Some buyers do not feel comfortable buying foreclosures because of the potential risks associated with a home that has been without a resident for a long period of time.

Don’t forget to let buyers know that the house was cared for in every way. Provide a list of preventative and schedule maintenance. Any warranties on major items provided are also a bonus.

Sellers should never try to compete with a foreclosure on price. They will not be supported by an appraisal and they cannot compete with a bank selling the house at their mortgage value. Sellers should focus on the above strategy to differentiate their properties from the competing foreclosures.

Patrick Mackaronis can be found on Twitter at @patty__mack.