29th April 2011

LEGISLATIVE UPDATE: STATES CONSIDER BARRING DISTRESSED SALES AS COMPARABLES

posted in Appraiser News |

Three states: Illinois, Missouri and Nevada are considering legislation that would prohibit or restrict the use of “distressed sales,” such as foreclosures and short sales, as comparable sales as a part of a residential real estate appraisal.

Homebuilders and real estate sales agents are concerned that the prevalence of distressed sales and their subsequent use as comparables, is resulting in the appraised value of residential properties not matching the contract sales price, or in the case of new construction, the cost to build.

The Missouri legislation, known as House Bill 292, would prohibit appraisers from using a property that has been sold at a foreclosure sale as a comparable. Similarly, the Illinois legislation would prohibit appraisers for the next five years from using as a comparable sale “a residential property that was sold at a judicial sale at any time within 12 months.” The Nevada legislation would prohibit the use of foreclosures and short sales. Maryland was considering a similar bill, but it has been dismissed.

If these bills are enacted into law, appraisers will be put in the difficult position of having to choose which law to violate. Appraisers are required to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers “must analyze such comparable sales as are available.” Further, the standard cannot be voided by a state or local government.

Not following USPAP could subject appraisers to having action taken against their licenses. Therefore, appraisers would have to make the decision to commit a USPAP violation – which in the case of federally related transactions would be a violation of state law – or to violate the law prohibiting the consideration of distressed sales as comparables.

To review the proposed legislation, use the following links:

IL – http://www.ilga.gov/legislation/97/HB/09700HB0092.htm

MO – http://www.house.mo.gov/billtracking/bills111/biltxt/intro/HB0292I.htm

NV – http://www.leg.state.nv.us/Session/76th2011/BDR/BDR76_54

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