When sales activity has diminished, as is the case in today’s market, appraisers have a much smaller pool of comparable transactions available to them. Such times require that appraisers give greater scrutiny to transactions that have traditionally been discarded.
Here’s why and how appraisers are reconsidering foreclosures, short sales and listings in an upside down market.
A sales transaction that complies with the definition of market value is often referred to as an “arm’s length” transaction. In this regard, an “arm’s length” transaction refers to a conveyance in which the parties are typically motivated, well informed, acting in their own best interest, have time to market the property and are not deploying unusual financing incentives.
Perhaps the most frequently cited example for a “non-arm’s-length transaction” is the sale of a foreclosed property. This is because, in a normal market, the mortgage balance is most often below market value. When the mortgage balance is below market value, the foreclosing lender has the option to cut the price of the real estate in order to achieve a quick sale. This allows the foreclosing lender to terminate his investment in the loan quickly and favorably, without the risk of an extended marketing period. Similarly, an owner who is selling in a normal market, under the duress of foreclosure, can cut his price for the purpose of quickly getting out from under a mortgage to salvage his credit.