How does distressed status affect a property's AVM or RVM®?

Both AVMs and RVMs® rely on public records information, emphasizing sales data, to arrive at a property's estimated valuation.

Distressed status can affect a subject property in these scenarios:

1) When comps used to calculate the value of the subject property were sold as distressed properties

2) When many nearby properties are sold in a distressed situation

3) When the subject property itself is distressed

Public records for comparable distressed properties can affect a subject property’s AVM or RVM®. That’s because REO (bank-owned) and short sales are market sales that are recorded with the county and documented as public records, and as such their sale price can be factored into a subject property’s AVM or RVM® estimate. REO and short sale transactions are weighted no differently than regular sales. And because the automated valuation model typically relies on a large number of comps to arrive at an estimated value for a subject property, a below-market transaction for one or two comps, for instance, will not have a tremendous impact.

If there is only one bank-owned property in a neighborhood, the property won’t have a big impact because the valuation model uses many comps. But if the majority are bank owned or short sale, the distressed sales will have a greater impact to the neighborhood estimates.

Foreclosure transactions, on the other hand, are not market sales because they are a transfer from homeowner to financial institution. And therefore they are not documented as public records. So foreclosure information related to a comp does not impact a subject property’s automated valuation.

In the case of an RVM®, the valuation model does not factor in listing-based short sale and REO information because these can often occur before the actual transaction.

The AVM or RVM® may make a small negative value adjustment when a subject property has been involved in a short sale or REO transaction. A Notice of Default (or other changes in status that indicate a home is distressed or in foreclosure proceedings) alone will not bring this adjustment, because it is not a sale, but it may signal a coming short sale.