One of the most important parts of any real estate transactions is by far the appraisal process. Here, a trained professional will gather as much information about a home as possible – along with information about comparable homes in the area – to determine a fair market value.
This is crucial, as no bank will ever sign off on a mortgage for more than a property is worth. Therefore, it’s a delicate process that needs to be executed properly. It’s also one that is impacted by a wide array of different factors.
One of those elements has to do with foreclosures in the immediate area. According to one recent study, more than 10,000 homes in the United States had begun the foreclosure process in September of 2021 alone – up more than 23% from one month prior. But how do these foreclosures impact the appraisal process and what long-term effects do they have? The answers to those questions require you to keep a few key things in mind.
To understand how foreclosures affect the appraisal process, it’s important to learn more about what they are in the first place.
A foreclosure is a legal proceeding in which a financial lender attempts to recover the amount of money they’re owed on a loan that has been defaulted upon.
In the real estate world, this means that after someone has stopped making their mortgage payments for a predetermined period of time, the bank has the legal right to take ownership of the property. Usually, that means that the current resident will be evicted and they’ll be able to sell it off. For various reasons, this also means that the home will likely sell for less than the fair market value because the bank is trying to recover their losses as quickly as possible.
It’s important to note that while the rules of this process will vary depending on the state, most banks try to work with homeowners to avoid a foreclosure altogether. This is because it’s incredibly inconvenient for both parties. The homeowner obviously needs somewhere to live, and the bank is now looking at a significant time investment in order to recoup their losses.
It’s estimated that currently, the total amount of time that it takes for the foreclosure process to be completed is 857 days. Having said that, it does vary greatly depending on which state someone is in.
All of this stems from the fact that when you take out a mortgage to buy a home, you’re using the house itself as collateral. That means that until you make your final payment, you don’t technically “own” the house – the bank does. Therefore, if you miss two or more payments, you’re likely to receive a demand letter in the mail. This will notify you that while the bank may be willing to make arrangements to help you get caught up, the situation has grown more dire than a single missed payment.
In most situations after a period of 90 days of missed payments, the loan will be moved over to the foreclosure department at the bank. In many situations, the borrower will have an additional 30 days to get caught up and reinstate the loan. If that doesn’t happen, the foreclosure process will begin in earnest.
Note that from the point of view of the borrower, a real estate foreclosure will usually stay on their credit report for seven years from the date of the first payment that they missed.
All of this is important to note because as homes under foreclosure can sell for dramatically less than houses in a more traditional buyer/seller situation, they are still often used as “comps” by appraisers.
When a certified appraiser assesses the value of a property, one of the factors they look at is other homes in the immediate area. They’ll consider houses that have similar features like the number of bedrooms, bathrooms and more. If one of those homes was a foreclosure, its value may not immediately reflect your own. This requires the appraiser to essentially adjust the value in order to reflect some of the differences that are found.
Another element that an appraiser would need to consider has to do with the stigma that foreclosures bring with them. If a house is foreclosed upon and owned by the bank, most people assume that there must be something seriously wrong with it – but this isn’t always the case. All of this is why the experience of an appraiser is of the utmost importance – they’ll need to use the knowledge they’ve picked up over their career to determine how the foreclosure should impact the value they set for the home they’re working with next.
Overall, the impact that foreclosures can have on appraisals – not to mention the local real estate market – will vary based on the situation. One of the major determining factors will be how well the home has been maintained by the previous owner. If it is simply a matter of the owner missing a series of payments to begin the process, that’s one thing. If they’ve allowed the home to fall into disarray, it’s likely to bring down the value of other comparable homes on the market.
The same is true of how long the home has been allowed to sit on the market. A foreclosure that was able to be sold by the bank quickly won’t impact appraisals as much as a home that has sat idle for many months or even years. It’s been estimated that areas with a significant number of foreclosures could see an overall decrease in home values by as much as 1%.
If you’re interested in finding out more information about how foreclosures impact appraisals in the real estate industry, or if you just have any additional questions that you’d like to go over with someone in a bit more detail, please don’t delay – contact AmeriMac Appraisal Management today.