It's nearly impossible to refinance your house these days without the lender requiring an appraisal (unless you're a lucky FHA borrower getting a streamlined refinance--and we'll talk about that tomorrow). And normally the biggest part of determining what your home is worth is the sales prices of nearby homes. But should the prices of foreclosure and short sale properties be counted when calculating what your property is worth?
The National Association of Home Builders doesn't think so. And neither do I--here's why. Foreclosure sales are associated with many risks--there is a chance that the title might not be clear, the previous owners may have vandalised the property, and the home is often not worth what the lender initially asks. So the only way to get a foreclosed property unloaded, knowing that buyers are taking substantial risks when they open escrow, is to offer significant discounts to entice an investor. A buyer that would not have to worry about these issues if he or she was buying YOUR house.
Same thing for short sales. There is a reason that only about one in ten of these go through. The banks want to minimize their losses but are also overwhelmed with problem loans and understaffed to deal with them. So the process takes months. Lenders won't even tell the homeowner if they'd consider a short sale until an offer is presented. So the buyer doesn't even know if the bank will allow a sale. Many banks even have a policy of requiring more than one offer before making a decision.
And some just prefer to foreclose and get it over with. A local Realtor here in Reno told me about a short sale home listing that received SIX offers, two of them unconditional, all-cash deals. She called the lender every day for over five months. The employee assigned to the house finally said, "I have had this hanging over my head for months. But I can get it off my desk right now if I foreclose on it. And that's what I'm going to do right now." And she did, and the bank immediately listed the house for less than four of the offers had been. So people who buy short sale property only do it if the rewards are worth the hoops they will have to jump through--a substantial discount Which, again, they would NOT have to do were they buying YOUR home.
So, while I think that the trends in a neighborhood (prices increasing or decreasing, how long does it take to sell an average home, and the percentage of homes in foreclosure) should have a bearing on the lender's requirements, they should not be used to value YOUR actual home. The lender could simply require more equity if your credit, income, assets, or other factors aren't up to snuff. And if you are trying to sell YOUR home, don't you want it to be evaluated based on it's features and condition, rather than an artificial situation created by someone down the street who may have been an irresponsible borrower?
