The main tool used by real estate professionals in appraising properties in foreclosure listings is sale prices of houses in the area. They will compare the market prices of similar houses in nearby areas to houses in foreclosure listings that they are appraising to get a comparable amount.
However, with sales volume declining rapidly, there are fewer houses to be used as comparison to determine the market value for houses in foreclosure listings.
As of January 2009, new homes sales dipped to a 45-year low while sales of existing homes declined to a lowest level in 12 years.
The difficulty of appraising houses in foreclosure listings has made it hard for distressed homeowners to refinance and buyers to acquire homes.
Because appraisals are based on market value estimates at given time, a reliable baseline is hard to determine with prices of properties in foreclosure listings falling rapidly.
Miller Samuel President Jonathan Miller pointed out that credible home values are hard to determine and closed sales are becoming irrelevant because they are lagging behind the market.
Some real estate appraisers who cannot use good sales figures opted to consider contract prices when appraising homes, especially those in foreclosures. These contract prices are the amount first agreed between the seller and the buyer. However, there may be flaws on this way of appraisal because many sales do not close.
According to Miller, foreclosure listings prices are not reliable because majority of sellers overvalued their properties.
This tendency of sellers to overestimate the market value of their properties is called by Eric Johnson, a Columbia business professor, as endowment effect. This so-called endowment effect causes homeowners to overprice their properties, and as a result, a big discrepancy between the sale price and list price is created.
With foreclosures wreaking havoc on the housing market and more and more homeowners finding difficulty refinancing their mortgages or buying a new home, appraisers are feeling the pressure to be conservative on their estimates.
Real estate appraiser Joni Herndon explained that lenders prefer appraisals to be at the lowest end of the price range.
In the event that lenders reject the appraisal, they can call for a second appraisal, or the seller can reduce the price of the property or the buyer could produce more cash.
Another appraisal option is automated valuation model that sets home values using a mathematical formula.
Finding the right appraisal is deemed important now that the federal government has unveiled its Homeowner Affordability and Stability Plan which offers refinancing and loan modification plans.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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