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Arms length, flips and foreclosures: Using Comparables to Determine Property Values Part 2
Posted on 07/31/2014 by Erik Wind
Last month we told you a little bit about how real estate professionals use comparable properties (or “comps”) to help determine the value of a property. We talked about what factors should be considered when looking for suitable comps (location, size, style, and date of sale), but we didn’t delve into how the circumstances of a sale can affect the suitability of a comparable property. Today, we’ve got some tips on how to use a property’s sales history to effectively weigh its value against another property you’re selling or considering buying.
In addition to geographic similarities, timeliness and physical characteristics, the circumstances of the sales need to be taken into consideration when choosing comparable properties. Market value is determined by using arms-length transactions, or a sale between two unrelated parties with no conflicts of interest sold under typical market conditions.
Examples of arms-length transactions include a real estate agent selling a property to a buyer who attended an open house, or a homeowner who sold his/her property by listing it on Craigs List. Example of non-arms length transactions include sales between family members, foreclosures, or flipped properties.
You can weed out a lot of these non-arms length transactions with a little due diligence. Look at the names of the parties involved in a transaction; if the last names are the same it’s likely a family transfer.
If a property was sold more than once in a relatively short period of time, it may have been flipped. Not all flips are bad, but flips have often been used to artificially inflate property values or to conceal ownership.
Other sales to watch out for are those that occur shortly after a bank files a lis pendens on the property. A lis pendens is usually a notification to the public from a bank that a borrower is in default of their mortgage loan. Properties sold in the wake of a lis pendens may be due to a short sale, foreclosure auction, or an REO sale. Any of those circumstances should be viewed differently than a typical market sale.
GeoData Direct flags sales comparables that sold as a result of a potential flip or foreclosure. Whether you’re an appraiser, investor, homebuyer, homeowner, or real estate agent, knowing this information and using it to make sound real estate decisions can greatly affect your success. Many areas have online data providers that have some or all of this information for a few hundred dollars per year. If you’re in the business or just looking to purchase a property, such an investment can pay off with huge dividends.
GeoData Plus is a real estate provider for New York, and we have a comparable search tool used every day by appraisers, brokers, and other real estate professionals. If you conduct real estate transactions in New York, try GeoData and you’ll find yourself with all the tools you need to find effective comps to make all of those real estate decisions that much easier.