It’s 5:45pm. You’re cruising home after a long day at work. You’re starting to have thoughts about what’s for dinner and what’s on cable this evening. As you turn the corner onto your block, you notice for sale signs in front of homes up and down your block. As you gander at all the different real estate signs you think to yourself, how’d I miss this?
The reality is that not only did you miss it, but a few hundred thousand of our neighbors across the country missed it too. It started like a small hole in a dam that no one notices. The water will continue to run and pour through the hole if left unattended. Eventually, through the process of erosion, the small hole will become a larger and larger hole. At some point what happens? The dam will break.
This is exactly what has happened to the real estate market over the past years. The value of property has been in a downward spiral because no one fixed the hole. The common questions these days are, how much is my home worth, and are the foreclosures for sale in my area going to affect my property value? Unfortunately, home values are at an all-time low, and yes, foreclosures for sale in your area will affect your property value. To get an understanding of why foreclosures affect property value, we need to look at how property value is estimated.
Please note that when I speak of the valuation of property, I’m using the term “estimating value.” This is because when attempting to determine the value of a property, it is merely an estimation. Not a concrete determination. This is because appraising or estimating the value of a property is not science.
It’s actually more of an art. While there are specific methods and techniques to estimate value, No two appraisers will appraise a property at the exact same price. Each will have their own opinion or estimation. But, that’s not to say that they won’t be close or within the same ballpark. For instance, two appraisers should be within roughly plus or minus 10%-15% if they are appraising the same home. Now, let’s review the three main methods of estimating property value.
Appraisal
A full blown appraisal or residential appraisals is completed by either a licensed or certified appraiser. The difference between the two is typically the number of classroom hours completed. Generally speaking the certified appraiser can appraise property regardless of property value. The licensed appraiser is typically restricted to property values of $1,000,000 or less. A certified appraisal will typically cost a few hundred dollars more than a licensed appraisal.
CMA
A CMA or Comparative Market Analysis is completed by a real estate agent or broker. CMAs are typically offered as a free service to perspective clients. Some real estate agents charge for a CMA under certain circumstances.
BPO
A BPO or Broker Price Opinion is an abbreviated version of a CMA and is also performed by a real estate agent or broker. A BPO is typically ordered by a bank, lender or asset management company to estimate the value of real estate prior to foreclosure proceedings being filed. More often than not, the BPO is completed as a “drive-by appraisal.” This means that the real estate agent or broker literally drives by the property, takes pictures and completes the BPO based on exterior condition only. Sometimes an interior BPO is requested if interior access can arranged.
No matter what method of valuation is used, the same basic principles are used. The subject property is compared to similar property within an 8-block radius that has sold within the past six months. Other properties are also taken into consideration, such as currently listed properties and properties that were listed but have expired. However, the estimation of value is more heavily weighted on the sold and closed properties within the area.
When preparing the estimation of value the subject property is compared to the closest in proximity and closest in style to the subject property. The ideal scenario is to find 3 sold, 3 active and 3 expired properties to compare the subject property to. So by now you should be getting the picture. If the recently sold homes within the area are foreclosed homes, they become your home's direct comparable properties.
The reason why foreclosures affect the value of your home is simple. If you purchased your home two years ago for $250,000 and you obtained a mortgage, you also had an appraisal done. This means that your property was worth what you paid for it at the time. I can almost guarantee that if you were to order an appraisal today that the value would be far less than original appraisal of $250,000. This is because the majority of the sold comps within the area are going to be foreclosed properties that have sold for less than the original value of $250,000.
So what’s the answer? For many homeowners the answer has been to make conscious decisions, like walking away from their homes because they owe more than the real estate is worth. From a business standpoint I do understand the logic behind that choice. However, I don’t believe that’s the best course of action. The market will and has begun to self-correct itself. Once the majority of the foreclosed properties have been absorbed or re-purchased, we will see a change.
Let’s make a comparison. Most Americans will knowingly purchase and finance a car that will immediately be worth less than they paid for it the minute they drive off the lot. Yet, they keep the car for years as the value depreciates. So I ask, if you’re financially able to stay in your home, why wouldn’t you?
Arthur Allen III - Arthur Allen, III is a licensed real estate broker in the state of Illinois and has been in the real estate business for 20 years. He has ...
