Illinois and three other states – Maryland, Missouri and Nevada – are considering legislation that would prohibit or restrict the use of distressed sales as comparable sales as a part of a residential real estate appraisal.
Industry professionals are concerned that the prevalence of distressed sales, and their subsequent use as comparables, is resulting in the appraised value of residential properties not matching the contract sales price, or in the case of new construction, the cost to build.
“The notion that you are going to excuse foreclosures from the calculation of value means that as much as you would like it to be higher, the value you are assigning the house will be overstated,” says President and Chief Executive of the Nevada Bankers Association Bill Uffelman, according to USBanker. “It will be contributing to a new bubble.”
The Illinois legislation, known as HB 0092 would prohibit appraisers for the next five years from using as a comparable sale “a residential property that was sold at a judicial sale at any time within 12 months.”
The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained in the Maryland legislation are somewhat broader and include any property that was sold under “duress or unusual circumstances, such as a foreclosure or short sale.”
There is, however, conflicting language in the Maryland legislation that appears to allow for the use of distressed properties as comparables if the appraiser takes into account factors such as the motivation of the seller, the condition of the property and the property’s history or disposition before the sale. Appraisers in Maryland will oppose this legislation during a hearing March 29.
If these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers “must analyze such comparables sales as are available.” Further, the standard cannot be voided by a state or local government.
Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation – which in the case of federally related transactions would be a violation of state law – or to violate the law prohibiting the consideration of distressed sales as comparables.