Abnormal Sale

Definition

An abnormal sale is a real estate transaction that diverges from usual market conditions. Such sales are often characterized by unique circumstances that invalidate their use as comparable sales in appraisals. These conditions may involve distress situations such as foreclosures, short sales, family transfers, or other factors that significantly affect the negotiated price. Because of these anomalies, abnormal sales do not accurately reflect the property’s true market value.

Examples

Foreclosure: A home sold through foreclosure could be priced significantly lower than comparable homes in the neighborhood due to the lender’s priorities to liquidate the property quickly.
Family Transactions: A property sold between family members at a below-market price does not represent an arm’s length transaction.
Short Sale: This type of sale, where the lender permits the property to be sold for less than the outstanding mortgage, usually occurs under financial distress and does not reflect a standard market transaction.
Estate Sale: A sale conducted under the will of a deceased individual might expedite the transaction, leading to a below-market sale price, hence considered abnormal.

Frequently Asked Questions (FAQs)

What are the primary indicators of an abnormal sale?

The transaction was under duress (e.g., foreclosure, short sale).
The sale did not occur through an open, competitive market process.
Relationships between buyer and seller influenced the pricing agreement.
Financial or personal distress influenced the speed of the sale.

Why shouldn’t abnormal sales be used as comparables in appraisals?

Abnormal sales misrepresent market conditions and property value, thus skewing appraisals if used.

Can an abnormal sale affect the overall market value in an area?

Generally, an isolated abnormal sale has minimal impact, but a series of such sales can distort market perceptions and potentially influence market value assessments.

How do appraisers identify an abnormal sale?

Appraisers review the sale’s context, including transaction history, seller motives, buyer-seller relationships, and the price relative to market norms.

Market Value: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and seller in an arm’s length transaction after proper marketing.
Appraisal: The process of developing an opinion of the value of real property, usually for financing or sale purposes.
Comparable Sales (Comps): Past sales of similar properties in a specific area used to help determine the market value of a property.
Foreclosure: The legal process where a lender attempts to recover the balance of a loan from a borrower in default by forcing the sale of the property used as collateral.
Short Sale: A sale where the proceeds from selling the property will fall short of the balance of debts secured by liens against the property.

Online Resources

References

Kahr, J., & Thomsett, M. C. (2005). Real Estate Market Valuation and Analysis. John Wiley & Sons.
Appraisal Institute (2013). The Appraisal of Real Estate (14th ed.). Appraisal Institute.

Suggested Books for Further Studies

Shapiro, E. (2011). The Complete Guide to Home Ownership. Beta Basic.
Scotland, B. (2014). Real Estate Appraisal: From A to Z. Rex Bookstore.
Elliot, L. (2019). Understanding Valuation in Real Estate. Real Estate Education Program.

Real Estate Basics: Abnormal Sale Fundamentals Quiz

### What usually characterizes an abnormal sale? - [ ] A significant markup in the property price. - [x] Unique circumstances affecting the price. - [ ] The sale of a newly constructed home. - [ ] Market conditions supporting high demand. > **Explanation:** An abnormal sale is characterized by unique circumstances such as distress that affect the transaction price, making it unrepresentative of typical market conditions. ### Why is an abnormal sale not representative of market value? - [ ] They always involve higher than market prices. - [x] Conditions like distress or family sale make it non-reflective of true market value. - [ ] The sale always involves luxury properties. - [ ] They are always above market value. > **Explanation:** An abnormal sale involves conditions that do not reflect typical open market circumstances, such as distress or family internal factors, distorting true market value. ### Which of the following can be considered an abnormal sale? - [ ] A property sale done through an auction. - [ ] Sale through a real estate agent. - [x] Property sold at a reduced price between family members. - [ ] Property sale during an economic boom. > **Explanation:** A sale at a reduced price between family members is often an abnormal sale due to non-market relationship considerations. ### How do foreclosures affect property values? - [ ] They increase property value. - [ ] They do not affect property value. - [x] They usually reduce property value. - [ ] They maintain property value. > **Explanation:** Foreclosures often lead to reduced property values because they are distress sales aiming for quick liquidation. ### Can an estate sale be considered an abnormal sale? - [x] Yes, it's often conducted quickly at less than market value. - [ ] No, it always reflects market value. - [ ] Only if sold above market value. - [ ] Not if sold through a real estate agent. > **Explanation:** Estate sales can be abnormal due to expedited transactions conducted possibly below market value. ### Why should appraisers avoid using abnormal sales as comparables? - [ ] They vary vastly in structure. - [ ] They are always in poor condition. - [x] They may not accurately reflect market conditions. - [ ] They are not legal transactions. > **Explanation:** Abnormal sales can mislead appraisers by not accurately representing market conditions hence should be avoided as comparables. ### During which situation is a short sale likely occur? - [ ] Economic boom - [ ] Market stability - [x] Financial distress of the homeowner - [ ] During property development > **Explanation:** A short sale typically occurs when the homeowner is in financial distress, leading the lender to allow a sale below the mortgage amount. ### When should you be cautious about a sale being abnormal? - [x] When it's significantly below market value - [ ] When it’s above market value - [ ] When done through an open market - [ ] When advertised extensively > **Explanation:** You should be cautious about a sale being abnormal if it is significantly below market value as it may indicate unusual transaction circumstances. ### Distress sales mostly impact comparable properties by? - [x] Lowering their perceived value due to reduced sale prices - [ ] Increasing their perceived value due to competition - [ ] Not impacting at all - [ ] Always enhancing demand > **Explanation:** Distress sales often lower the perceived value of comparable properties due to appearing as reduced sale prices. ### What diminishes the likelihood of using an estate sale as a comparable during appraisal? - [ ] Ensuring decor and aesthetics are recorded. - [x] Conduct of the sale below regular market conditions - [ ] Sale during summer - [ ] Sale through certified agents > **Explanation:** Estate sales are often conducted under unusual pressures leading to below-regular market conditions that diminish their use as comparables during appraisal.