When there are only 1 or 2 REOs being sold in a few months but a lot of normal sales then no the REO is not a comps. When REOs make up more than 50% of houses sold in the past 3 months then they become valid comps.

I saw some recent guidelines where REO's could not be used as comps, regardless of how many sold close by. The rational was that they were not arms length transactions IAW USPAP requirements.

Just FYI - a CMA from your realtor is not the same as an appraisal. A CMA is only a guide to what comparable properties are selling for in your market so you can price accordingly. If you are selling a rental property and the market is flooded with foreclosed rental properties, then your agent wouldn't be doing their job if they didn't point that out to you. To me, it sounds like your agent is just trying to set your expectations to match market conditions.

Look at it this way. If you were buying a rental property and there were 2 for sale on the same block, wouldn't you compare them even if one needed a bit of work? People looking for investment property really do have a different mindset than someone looking for a home to live in. Anyone who has been a landlord before generally views a bit of fixup as par for the course.

My area is ripe with REOs/distressed properties. I've been told by all three agents that I interviewed that appraisers would be using them as comps. :( It just doesn't seem right. I watch the local market carefully and see some tract-built neighborhoods where the values are holding pretty well, while my custom built neighborhood (of similar size homes with much nicer landscaping and common areas) is sinking quickly due to the number of REOs. This is sucking big time! As houses in my neighborhood sell I continue to be amazed at the prices and have been told by my Realtor (who is the outgoing president of the RE board) that the low prices are due to the appraisals coming in low. For example, one house very similar in size to mine was listed at $290k, offer was $275k and it sold for $245k since that was the appraised value due to the lack of "real" comps in the immediate area.

We are relocating from northwest FL to North Charleston, SC. The agents in SC have told me that appraisers are NOT using REOs are comps.

I'm just not sold on the idea that this is the true "market" price of these homes. I was an economics major in college, so I totally understand the concept of supply and demand, but it doesn't seem that this is a true market.

This is why I was so happy when one of the agents we interviewed said she knew of a colleague's cash buyer who was interested in our neighborhood. She got a "pocket listing" for 1 week for this buyer, who did put in a contract on our house with no appraisal contingency (yay!). BUT... the buyer never made good on the contract and never deposited their earnest money. Kept giving me the runaround about it coming out of a trust fund and needing more time yadda yadda. She even had the pool guy out to measure my back yard! In the end, I listed it with a different agent and told those buyers to put up their $$ or go away (and I'm consulting an attorney about their default on the contract...).

I'm not an attorney, but have taking Blaw courses. Generally, consideration has to change hands for there to be a contract, ie escrow.

Had a similar thing with my buyer on my house, everything yes yes yes, then these things take time.... December is a busy month....then they backed out. it sucks, but it happens.

More food for thought regarding appraisals..

Foreclosures weigh on home appraisals
By ALEX VEIGA, AP Real Estate Writer
Jan 3, 2010

LOS ANGELES �" It wasn't the first time that Katherine Scheri ruined a real estate agent's day with a low property appraisal.

Scheri, a real estate appraiser, had sized up a three-bedroom, two-bath house in Santa Ana, Calif., for $30,000 less than what the buyers offered to pay. A typical deal-killer for a seller.

The agent urged the lender to force Scheri to consider several other properties that could back up the original $310,000 sale price. Then he tried good old-fashioned guilt, telling Scheri her appraisal was going to ruin the buyers' shot at the American Dream.

"That's what he laid on me," Scheri recalled. "And I said, 'Don't you care they could be potentially spending $30,000 too much for a house?"

Across the country, agents and homebuilders are complaining too many appraisals are coming in low, scuttling deals.

The National Association of Realtors says nearly one in four of its members has reported clients losing a sale due to botched appraisals. The National Association of Home Builders, meanwhile, said low appraisals were sinking a quarter of all new home sales and argues it's not fair to compare distressed properties to brand-new homes.

And that gets to the heart of the problem.

Roughly 40 percent of all home sales this year were foreclosures or short sales, meaning the property sold for less than the mortgage. In some markets, like Las Vegas and Phoenix, they've hit more than 50 percent.

Appraisers determine the value of a property by looking at recent sales of comparable homes. They take an apples-to-apples approach, excluding or making adjustments for certain features, such as a swimming pool or finished basement. And generally, a foreclosure isn't used as a comparison for a standard sale.

But in some areas, appraisers like Scheri contend they are only sizing up homes according to the reality of the market, though they concede its becoming increasingly harder pinpoint what a home is worth.

The Joint Center for Housing Studies examined home sales over 20 years in Massachusetts and found that a foreclosure within less than 100 yards of a home lowers the price of that home by 1 percent.

A link that might be useful:

abcnews.go.com/Business/wireStory?id=9468512

The federal guidelines for appraisals are online at the HUD web site.

These are the rules that must be followed for a loan to be conforming.