The Valuation of Foreclosed Properties

(An oversimplication )

Prepared for:California Association of Clerks

and Elections OfficialsNew Law Workshop

Property Tax Rule 2The price at which a property, if exposed for

sale in the open market with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent under prevailing market conditions, between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other.

Establishing roll value on residential properties For Prop 8s, Assessed

value = lesser of factored Prop 13 value and current market value

Market value is determined by sales of comparable properties (similar in location, age, size, condition, amenities, etc)

Market valueQuestion: Can sales of

distressed properties be used as comparable sales?

Answer: Maybe, although this goes against traditional appraisal theory, as well as statutes in some states

Impact of Foreclosure Sales Are the foreclosure

sales affecting the sales prices of typical sales in the area?

Are the foreclosure sales the most commonly traded properties in a market area?

Recent Foreclosure Activity

Sacramento County Foreclosures

0500

1000150020002500

Month of Filing

Nu

mb

er

Sales Following Foreclosures

Year Number Percentage

2004 155 0.3%

2005 97 0.2%

2006 1,258 0.4%

2007 7,749 36.0%

2008 17,485 58.0%2009 4,386 20.0%

Are distressed sales market sales?

Are distressed sales market sales?

Are these common?

Have foreclosures affected market value? Yes. For properties selling in 2008 and

2009 especially, there is little or no difference between the sales prices of arms-length transactions and those coming out of foreclosure.

However, additional research is necessary.

Are the properties truly comparable?They may look like this on the outside…….

But they look like this on the inside

What do we compare? Physical Attributes (size, quality, age,

amenities) Location Condition (Incidence of vandalism,

stripping) Time on Market Number and percentage of foreclosures

Questions?