Distressed Sales Impacting Appraisals?

[James Free]

I have a thought that I'd like to run past the group.

I've been refinancing my portfolio to take advantage of lower interest rates lately, and I've found that my appraisals have been increasingly disappointing. More annoyingly, I find that they almost always exactly match Zillow's "Zestimates" for the houses as of the day of the appraisal, and that those numbers have declined in the weeks leading up to the appraisal.

Now, it's tempting to just shake my fist at lazy appraisers copy-pasting Zestimates, but I've had different appraisers in different properties. It would be quite a coincidence. Rather, when looking at the comps used in both the appraisals and Zillow, I'm starting to think that both methods of evaluation might suffer from a common characteristic: Not distinguishing between distressed sales and normal sales.

And this might make sense. If distressed sales become prevalent, why would any buyer - investor or otherwise - not hold out for a "distressed" price? Lower comps are lower comps; the impact on the value of your properties is legitimate!

Except for one thing: Condition.

Zillow's biggest weakness has always been its complete unawareness of property condition. A $50k kitchen remodel and a kitchen untouched since the 1970s are both just "kitchens" to the computer. Distressed sales are far less likely to feature cleaned-up, fixed-up interiors that we commonly see in MLS sales. While computer-generated comparisons can be decent when all properties are in similar condition, that is going to become less true as distressed sales become a larger share of total sales.

And it's not easy to identify distressed sales; they're not always foreclosures or short sales. Sometimes it's just a quick cash sale to an investor! Or even one involving an agent!

Nevertheless, we'll see the impact in appraisals, and that's something every investor needs to be prepared for, whether he's refinancing or financing a conventional purchase loan.