Sunday, March 14, 2010

What the bifurcation is going on?

I am working on an appraisal of a nicely sized 4 level split on 5 acres in northern Anoka County, MN. The appraisal is for a purchase and of more interest is the sale is not bank related; a rarely seen traditional sale.

Like many communities, the place is drowning in REO listings. In my comparable sales pool, 73% were bank related sales.

If bank sales are the vast majority of the market do they “become the market” in spite of the atypical motivation often involved? I’ve heard arguments both ways.

One argument discusses the principle of substitution. In an area where buyers see no difference between bank properties and traditional owner properties then the bank sales are comparables for owner-occupied homes.

On the other side appraisers argue that bank sales often involve atypical motivation and other factors that are more reflective of liquidation value rather than market value. Thus bank sales are not reflective of the market and are not used as comparables for a traditional sale.

Depending on which point of view you hold you either ignore 73% of the market, as in my case, and risk omitting comps a reviewer will rip you for not using or your value conclusions arguably are more akin to liquidation than market value.

I admit I lean towards substitution in my comp selection. If a bank sale is a substitute it is a comparable.  This may have resulted in a disgruntled home owner here and there.

So, the subject is under contract for $205,000 in a traditional sale and most of the recent sales, which were bank related, are physically superior in terms of size, age and condition and have sold for prices between $160,000 and $190,000.

So am I on the express bus to a deal killing low value or could this contract price be supported in spite of physically superior homes selling for less?

The answer lies in a term we have been hearing about about lately - bifurcated market.