Is a foreclosure sale a valid comp? Not always.

So the boarded-up, foreclosed house across the street finally sells at a fire-sale price, saddling the entire block with a new reality: prices are falling, and so are property values up and down the block. Right? And that means property taxes on that block should be reduced accordingly, right?

Er, wrong, according to the assessor's office in Riverside County. For the purposes of property tax assessment, the office does not count all foreclosure resales as true comps.  To be clear, I'm not talking about trustee auctions on the courthouse steps; I'm talking about the second foreclosure sale, when the bank lists the house and sells it on the open market.

Linda White, chief deputy assessor in Riverside County, tells L.A. Land that, when trying to determine the extent to which property values are falling, the county sometimes concludes that the sale of a distressed home should count less than other sales.

"We never discount them completely," she said, referring to foreclosed houses that are sold. "They would not be given as much weight as a non-bank-owned transaction."

This surprised me. I figured a sale is a sale. A comp is a comp. Not so, says White: "It’s not always considered an arms-length transfer. The banks are dumping the properties, they’re not even looking at the market value sometimes. It would be looked at more carefully." She added, "We try to be fair.”

The issue came up in an e-mail from a reader who was angry when the county told him his property value had not been damaged as much as he thought it was by all the recent foreclosure sales in his neighborhood, and thus his taxes would not be reduced accordingly. The reader wrote -- persuasively, I might add:

Riverside county is valuing my house based on non-bank-owned, non-foreclosure properties. In normal times, that would make sense. In normal times, bank-owned properties don't set the standard but are an exception to the norm. However, in January of this year, the month when the values were determined for my home, almost all of the homes that sold were bank-owned. Therefore, if one only looks at non-bank-owned sales, they represent a tiny fraction of overall sales, and they distort the fair value of the home far above what it should be worth, giving more tax money to Riverside county.

Meanwhile, the people that kept their homes and didn't walk away are not only holding homes worth 60% of their original purchase price, but are now paying taxes well above what their homes are fairly worth.

Great points. Your thoughts? Comments? E-mail story tips to Peter Viles.

-- Peter Viles

Photo credit: Getty Images

Comments

[the problemwithcaring]

If the price of REO's weren't reflecting the true value of homes, then banks wouldn’t price them so high and their sales wouldn't be dominating the real estate market.

Zillow does the same thing (discounts sale of foreclosures), and I just don't get that.

[TakeFive]

"We never discount them completely," she said, referring to foreclosed houses that are sold. "They would not be given as much weight as a non-bank owned transaction."

That sure seems ripe for a legal challenge. Could they explain exactly how the weighting standard if formulated? My guess – they’re in a panic at the inevitable loss of revenue and are busy crafting some “standard” that will prevent further erosion.

[RandomAnon]

Doing valuations for asset managers, you get disclaimers for expected value like the following:

"Use of REO Comps
Please note the following guidelines when selecting comps to complete your reports. It is generally not acceptable to provide comps that are REO properties; however, there are a few scenarios where it would be appropriate. The following guidelines are intended to help answer the question of when the use of REO would be acceptable.

Markets that have significant but not predominant REO activity and areas that may have two markets resulting in a mix of conventional buyers and investors:
The use of both REO and non-REO comps is recommended in these areas. The observable condition of the property should be carefully considered when determining values.

Markets where REO transactions occur but are not predominant: Distressed or REO comps should not be used in these markets, as they are most often not a true reflection of the factors driving values in these areas.
Markets where REO transactions are predominant: It is appropriate to use REO comps when REO transactions are predominant and drive that market. Using REO comps in this case will best represent that market's value."

Riverside would definitely be a REO dominated market. The city wants their money though.

[LA]

The discrepancy between sales price and assessed value is not exclusive to foreclosure sales. When I bought my SFR in 2004, LA County immediately reassessed the property to more than twice the sales price. I had exercised a lease/purchase option from 2001 at a 1998 price, values in my neighborhood had shot up, and multi-unit-zoned lots were in demand, so the reassessment wasn't a total surprise. It seemed fair at the time; now I'm looking forward to watching the assessed value and my tax bill go down for a few years.

[sheila]

san bernardino county pretty much gave everyone who applied a flat 25% tax rate drop without reassessing properties individually or resetting values for everyone who bought from something like 2005-2007 (not certain of those dates, but it's around that).

the discount remains in place as long as values are in the toilet. no idea if the discount will increase for next year if values drop further?

if/when the market comes back up, the temporary discount will be canceled, and the normal prop 13 increases for the discount period will be applied as though nothing ever happened.

[mike]

just shut up and hang on to your house as a long term investment and not a liquid asset and you will be fine.

[Dougmc]

The Riverside County Assessor, like all the other county assessors, is strongly motivated to keep assessed values from plummeting. Whether an REO is a valid comp depends on a number of factors.

One important factor, which is never discussed and ignored by assessor's, is how long the property was on the market before it was sold. If it was snapped up within 10 days of being listed, then maybe it was an under-market bargain. On the other hand, if it took 4 months or longer to get it under contract, it's sale price probably reflects the market pretty well. I've seen a few of those in West LA.

The aggrieved property owner in Riverside County should not give up. He should take whatever he can pry out of the Assessor this year and, if non-REO properties follow the foreclosure market down, apply for another reduction next year.

[SouthOCRenter]

This is hilarious, if the guy was trying to get a HELOC or a refinance, he would be arguing that REOs should not be counted, but now that he might save a little money on property taxes, he is arguing that they should be counted.

Welcome to the Real Estate shuffle.

[anonymous]

The email writer is correct. Foreclosures are setting the market prices. They should be included. Local governments, like everynone else, need to get used to the fact the party is over. Prices and values are coming down to earth. They, too, need to quit spending money they don't have!

[Milla]

does anyone know if this is common practice in LA County? the post only cites Riverside County.

[Nick]

I have a novel solution for the whole issue: require the county to extend an open offer (valid for 30 days from adjustment or something) to purchase the property for the assessed value, no questions asked, if they refuse the lower the assessment when challenged. In good times, assessed values will be far below market value, so if anybody exercised the option the county could just resell the property at a profit. Conversely, if they overvalued a property, they would be stuck with it (or the loss after selling it), providing a strong incentive to not overvalue properties for tax purposes. The challenge provision would allow "closer look" appraisals in the case of substantial changes to the property.

That's what I would do to prevent this problem, anyway.

[Anonymous]

I can assure you that no seller's agent is going to use the foreclosure as an adequate comp; so why should the government? Sure, the foreclosure should be considered, but its relevance should be discounted at least somewhat because of the circumstances of its sale.

[David Raether]

Gee, whiz. So you're telling me that a county tax assessor is discounting a foreclosure or bank sale when determining surround house value?

I wonder if the county tax assessor's office may have some stake in artificially holding up values.

Nah. Impossible!

[Dave]

"We never discount them completely," she said, referring to foreclosed houses that are sold. "They would not be given as much weight as a non-bank-owned transaction."

Just another "official" living in denial.

Yawn.

[Chris]

The problem with any comp is that it does not take into consideration the condition of the houses. If a REO with dead landscaping, stripped hardware, and concrete down the toilet sells I wouldn't expect a move in condition house on that same street to sell for the same price. If Riverside County can demonstrate that foreclosure sales underperform the regular market price by a certain percentage I'd say they are on strong ground to defend the policy.

[Laker]

"...says White: "It’s not always considered an arms-length transfer. The banks are dumping the properties, they’re not even looking at the market value sometimes..."

What kind of Bull sh** is that???
Banks are dumping properties and not looking at market value???
Are you telling me that if similar houses are selling for say $500,000 in one block, and there comes a bank that lists a house on the MLS as REO and is asking $150,000...that it will get sold for that amount??? This is baloney soup. That house would then get multiple offers that will pull it up to very close range of $500,000.
EVERYTHING that is getting sold is sold AT the market value....I'm not saying it is fixed value. But it sure will be in a +-10% range. I'm not talking about a bank secretly selling a house to one of its insiders without the exposure to the general public. If it is listed on the MLS, it is A COMP!
I'm sure that poor riverside owner that is now upside down by $150,000-250,000 and is a true good citizen trying to stay put, and pay his taxes, the state government is forcing him to dump his house to foreclosure and buy same thing next door for half the amount, and therefore pay half the property taxes he is paying today.
That is the pure example of government unintended consequences....But not lowering his taxes and admitting that the market price has dropped, the government DEFACTO is creating another foreclosure....
WHAT A STUPIDITY !

[RM]

Laker, totally agree, the government is adding to the foreclosure problem in trying to stick homeowners with high property taxes. Not only are property taxes helping to cause more foreclosures, but they are also keeping people from wanting to buy up or build a new home. I've got a property with nice views that I was planning on building another home on, but just the thought of how much I'm going to be paying in property taxes is demoralizing (mortgage $2500/mo, prop. tax $800-$1000/mo).

[Todd in WeHo]

Is a foreclosure sale a valid comp? YES! I challenge anyone to go to http://realestate.yahoo.com and search "Foreclosures" within a 10 mile radius of West Hollywood and then try to tell me that the 14,387 foreclosures are not valid comps. Anyone ... anyone???

[TrojanDLA]

The County wants their cake and eat it too. It sure didn't complain when property values rose up and up and up based on illegitimate borrowing standards and artificial inflation due to fraud, overzealous appraisers and lender greed. Yet, when it's time to drop the prices due to the absence of these factors, the County no longer wants to play? PULEEEZE!

If the County was "fair" then they would've taken into account that the purchase price was not the true market value in 2006 because 30% of that price was due to the "bubble" frenzy. However, if they want to benefit from a 30% premium due to irrational market behavior, they must also suffer the consequences of the correction.

Silly County, you really think we're stupid huh? Don't even talk about fair. If you are going to enjoy all that influx of cash in 2004-2007, you now must suffer the same fate as everybody else in the downfall.

[Santa Barbara Real Estate Voice]

This is a tough question and depends on so many factors. I would say that in a PUD complex or a condo complex where the homes tend to be fairly similar, an REO then becomes a good comp. With that said, if it is a strong area and there are only 1-2 foreclosures then maybe this is not that strong of a comp. Here is Santa Barbara CA where home values can be $700K and then $1.5 just 2 blocks away, you have to look very closely at REO's as comps.

Long story short, it is always a case by case situation (like most real estate) and can not be given simply a yes or no answer.

Blog: www.SantaBarbaraRealEstateVoice.com

[John]

It is obvious that the assessor's office is being stubborn and greedy in an attemp to collect as much as possible in taxes. I appealed my value (initially reduced from $512k to $446k) and am waiting for a response but am not hopeful. In my particular subdivision (Creekside Village in Murrieta), there have been 25 homes sold this year at a $ / sq ft of $94. That would put my home's value at $274,000. In fact, only one home in our subdivision has sold for more than my home's appraised value and that home is over 1200 sq ft bigger on a lot that is three times the size. Not only is the assessor's office being unfair, they are being outright criminal.