My Neighbor Just Had a Fire Sale, Now What???
Many homeowners have very valid concerns about the impact of a neighbor who has a comparable unit but is selling their property at a rock bottom price. But the true impact of their actions depends on a number of variables. In today’s market, many factors come into play with pricing, including foreclosures and short sales, and the normal life changes that involve family, job, and other personal choices.
When a neighbor sells at a very low price because of a new baby, job transfer, or other situation, the impact on the immediate market value of comparable units can be significant, but not necessarily devastating. To determine market value, appraisers are required to use three closed comparables from the previous three months, as well as one pending and one active unit. Many appraisers include a sixth property in this equation to present the bank with a more solidly supported price.
Appraisers Look at the Neighborhood, Not Just the Foreclosed Property
Your neighbor’s low-priced unit must be included if it is a true comp, but the appraiser cannot base the value entirely on that unit, even if it is identical and in the same building. If your unit is on the market and you find yourself in this situation, gather as much information on the neighbor’s situation, as well as on other comps in the neighborhood. This will be critical in making an effective argument for a higher price on your unit. If your neighbor is keeping quiet, have your agent contact their agent. Agents often share information they really should keep private. The low-priced sale will have less impact on your property value if you sell more than three months after the distressed property closes – wait if you can.
What If My Neighbor is in Foreclosure or Agrees to a Short-Sale?
A foreclosure or shot sale is not a measure of the true market value. The true value is driven by the amount owed to the bank. Moreover, foreclosure units, unlike regular sales, are frequently in very poor condition, missing appliances, and often sold as-is. Buyers usually wait months to get the transaction closed and they are compensated for these factors by a lower price.
Appraisers disagree on the use of foreclosures and short-sales in determining the value of comparable units. Some believe that these transactions should be included in determining market values. Others feel that the unique factors associated with a foreclosure or short-sale are enough to differentiate the sale from other closings. Appraisers find it much easier to justify not using foreclosure and short-sale pricing data than to take into account your neighbor’s fire sale because they had a second baby in a one-bedroom condo. Regardless of this debate, remember that all appraisers must use multiple sales to assign the proper price.
Knowledge is Power
It is critical that you fully understand all comps in your neighborhood and that you have your pricing built on actual data. No one can argue against written and proven data such as other comps. Keep up to date on your data. If you have been on the market for one month, ask your agent for an updated market analysis. Explaining the non-tangible reasons for a low-riced sale may or may not carry weight with a buyer, but you must fully understand why your neighbors are selling for a low price if you have any chance of getting the highest price for your property.