Bills Prohibiting Use of Distressed Sales as Comparables Die
Proposed legislation in Illinois, Maryland, Missouri and Nevada seeking to prohibit use of foreclosures and short sales as comparables in developing opinions of residential real estate value appears to have failed. Two bills missed procedural deadlines, one has been amended and the other was withdrawn by its sponsor.
Appraisal Institute chapters in all four states played key roles in defeating the bills, which would have resulted in each state’s legislative body dictating the real estate valuation process.
The Nevada bill missed a procedural deadline for passage and is dead for this session. In testimony prepared for an April 1 hearing that was canceled, the Appraisal Institute pointed out that under federal law, appraisers are required to follow the Uniform Standards of Professional Appraisal Practice for federally related transactions, which include most residential lending transactions.
Under USPAP, appraisers “must analyze such comparable sales data as are available.” This means all sales, including foreclosures and short sales. When USPAP adherence 
is required, such as in federally related transactions, no part of the standard can be superseded by a state or local law. That prohibition prevents states from enacting legislation that pre-empts the federal law that requires compliance with USPAP.
The Appraisal Institute also pointed out: “If this bill is enacted into law, there is also the possibility that Fannie Mae, Freddie Mac and the Federal Housing Administration will simply stop accepting appraisals for loans originated in Nevada. This is because these entities require compliance with USPAP, and these appraisals will not be USPAP compliant.”
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How would one consider the margin between liquidation and regular market to accommodate, extrapolate, or deduce meaningful investor incentive ranges, if not utilizing distressed comps?
Unless such ruling is tied to holdback periods for lenders to sell to investors, and holdoff periods to prescribe at least three months exposure to set liquid price, such an approach only deals with half of the problem at best.
Constrains against independence will not result in additional credibility from independent appraisers.