Real estate professionals could identify a distressed property sale and discount its effect on relative prices when performing an appraisal or providing a comparative market analysis (CMA). When the value of entire neighborhoods is decimated due to foreclosure or short sales, the impact cannot be ignored.
Appraisals are based on the most recent sales price in the area of the prospective purchase. They compare properties feature by feature and assign a value to similar properties within a given area based on previous sales. The appraiser has a certain amount of latitude interpreting the differences and similarity and assigning a realistic value to the property being purchased. There is generally a moderate fluctuation for price changes to allow for inflation or demand.
One foreclosure sale out of 20 transactions may be ignored and not used as a comparison for appraisals of future sales. A personal comment block from the appraiser may contain a statement such as Deviation in sales price is the result of property being acquired at foreclosure. Translation, this buyer got a good deal and the sale of the foreclosed property would be excluded as a comparison to future sales in the area. This is a method of stabilizing the value of a neighborhood and not letting it be compromised by the rare foreclosure sale.
If you are using a professional real estate broker to purchase property, ask your agent for a comparative market analysis. The CMA has information of previously sold property. The information may include listing price, sales price, and concessions from the seller from recent real estate transactions in the area. It will help identify trends in a neighborhood effecting long term value. The information contained in a CMA is not comprehensive as a complete appraisal. It is an informative source of information and I consider it an indispensable tool. The agent may not want to provide the information, but if they do it can save several hours at the courthouse researching the same information.