In answer to your question about what happens when performing appraisals in a market that’s heavy with foreclosure and short sales, the answer is that it depends.
If there are only a couple of those types of sales and they don’t have much impact on what the typical buyers and sellers are doing then we ignore them. Once the numbers of these sales increase to the point where a typical buyer can pretty much count on finding one upon demand they comprise their own market and start influencing the liquidity of the higher non-stressed market. Once there are enough of them that the non-stressed sales are directly competing, the REOs drive the market.
It’s all about trends. Appraisers aren’t supposed to be picking the 3 highest or 3 lowest sales, but the sales that best represent the dominant trend. In the market’s your describing, these stressed sales are becoming common enough that they are the trend so that makes them the most representative sales to use in an appraisal.
Put another way, if a lender were to have problems with a loan, what could they expect to get back from the sale of their collateral?
