A well-respected appraiser, Jared Mickel, responded to Home $$$s and Sense after it recently addressed the price differential between distressed and non-distressed properties.
Distressed properties are defined as bank owned and short sales, where the homeowner is upside-down.
Homeowners who are not upside-down and wish to sell their homes need to know that although their home is competing with distressed properties, they are not necessarily priced the same.
As illustrated (see graphic), distressed properties in today’s local market are discounted as much as $15 to $35 per square foot below non-distressed properties.
As you can see by the chart, the price differential is constantly changing.
An up-to-date differential analysis when pricing your home for sale will be a matter of good Home $$$s and Sense.
Here’s what Mickel has to say:
Dear Sue,
As you can see, the chart shows about a $35 per square foot differential between the regression line for the distressed properties (red) and the regression line for the resales (green).
When you’re looking at these things, it’s always important to remember that the differential is composed of a couple different things that all contribute to the lower selling price.
The first is obviously quality and condition — the typical real estate owned (REO) and short sale have not been cared for or upgraded as much as the typical resale. The second is the transaction conditions — banks have developed a well deserved reputation for being difficult to deal with on short sales and real estate owned.
You will occasionally hear that “they’re getting better,” but the reputation will live in the minds of buyers long after the reality. So typically as an appraiser I’m looking at some fraction of that differential ($35 in this case) as the reasonable discount for dealing with a distressed property compared to an non-distressed property of equal value.
Typically, when I’m appraising I’ll use one third of that differential as my REO/short sale adjustment and then maybe tweak it from there if a higher or lower portion will better explain the difference between the comparables. Employing this technique throughout the Sacramento and south Placer County residential areas, it’s real common to see adjustments in the $12 to $15 per square foot range.
The results vary quite a bit though depending on how much of the market is distressed. Typically when you start seeing 75 percent or more of the market as distressed the differential closes to essentially zero — the REOs are the market at that point and the most the resale seller can hope for is that they luck into somebody that will pay a touch more for a seller that can close quickly.
At the other end of the spectrum, when there’s just a handful of REOs in the market, the differential also gets smaller. Essentially the supply of inflexible bank sellers matches the demand of buyers that are willing to deal with the inflexibility. At least that’s how I read it.
One thing I noticed putting this together is the two blue boxes. Both of those boxes span an equal time interval, but the proportion of distressed sales is way up in the most current time period. Basically, over the Christmas break, we flipped from a resale-dominated market to a distressed-dominated market.
This will bear watching.
~ Jared Mickel, Confluence Appraisal
Sue Thompson is owner and sales manager of HomeTown Realtors in Auburn.
