Distressed Sales and the Averages They Drag

Not every sale is a willing seller meeting a willing buyer with time on both sides. Some are sold under pressure, on a deadline, by a party with a duty other than getting the best price.

Those transactions are real, they are recorded, and most summaries count them exactly the same as everything else. In a small market, a few of them can drag a figure somewhere the ordinary market never went.

What counts as a distressed or non-standard sale

The category is broader than people assume, and the members differ from each other.

Foreclosure sales. A lender disposing of a property it took back. The seller is an institution with a cost of carrying, not a household with a preference about timing.

Short sales. A sale requiring lender approval because the proceeds will not cover the debt. Long, uncertain, and often sold in whatever condition it is in.

Probate and estate sales. A fiduciary selling on behalf of an estate, with duties, sometimes court oversight, and a property that has often been lived in for a long time without recent updating.

Trust sales. A trustee with a duty to the beneficiaries, which shapes both the process and the timeline.

Sales between related parties. A transfer within a family or between related entities, where the figure recorded may reflect a relationship rather than an open-market negotiation.

The last is the most important to catch, because it is the least like a market transaction and the least visible in a summary.

Why they land low, and why not always

The usual expectation is that distressed sales come in below the ordinary run of transactions, and there are structural reasons for that: condition is often deferred, marketing time is often shorter, the buyer pool narrows when a property needs work or when the approval process is uncertain, and the seller's motivation is different.

But the expectation is not a rule. A well-located property sold from an estate can attract intense competition precisely because it has not been touched in decades and buyers want the lot or the bones. Assuming every distressed sale is a discount is its own error.

What is reliably true is that these transactions are drawn from a different process. Whether they land high or low, they are not evidence about what an ordinary seller with ordinary time would achieve.

The small-market amplification

In a market with thousands of monthly transactions, a handful of distressed sales barely registers in an aggregate. In a town with a small monthly count, a handful can be a meaningful share.

Combine that with the mechanics described in what a median home price hides in a small market and the arithmetic gets uncomfortable. A month with two unusual transactions and a month with none can produce figures that appear to describe a market shift and in fact describe two estate sales.

Note that a median resists this better than an average. An average is pulled by the size of every value; a median only cares about position. That is a genuine argument for preferring medians in thin markets, though it does not make a median immune — enough non-standard sales change the middle too.

Whether a report excludes them, and how to find out

Some reports filter these transactions out. Some flag them. Most do neither and simply count what the database returns.

There is no way to tell from the figure itself. The only route is the methodology note, which is why the data behind Claremont market reports, and how to check it keeps returning to the same point: the footnote is the document.

If a report says nothing about how it treats non-arms-length or distressed transactions, assume they are included. That is the default behaviour of a query, and most reports are queries.

Reading the individual sale rather than the aggregate

The practical defence is to stop looking at the aggregate and look at the transactions.

Individual records often carry indications of a non-standard sale — remarks about lender approval, court confirmation, sold as-is condition, or a seller described as an estate or institution. Those markers are not always present and not always reliable, but they are far more informative than a summary figure that has already absorbed the transaction without comment.

Where a record does not say, the physical facts often do. A property that transacted well below its neighbours, in a town where that does not ordinarily happen, is worth understanding before it is used as evidence about anything.

Why it matters for a specific decision

Two ways, in opposite directions.

If you are pricing a home and a distressed sale sits in your comparable set, it will pull your expectation down for reasons that have nothing to do with your property. A well-maintained home sold with ordinary marketing time is not competing on the same terms as a property sold as-is under a deadline.

If you are a buyer, the mirror error is assuming a distressed sale sets a precedent you can expect to repeat. It usually does not, because the conditions that produced it were specific to that seller.

THE SALE HAPPENED. That is not in dispute. The question is whether it is evidence about the market or evidence about one household's circumstances, and the answer is usually the second.

How this is handled in property-specific work

A comparative market analysis is the place where these judgements get made explicitly. Anthony prepares a CMA that identifies whether a comparable sale was an ordinary transaction, and says so when it was not, rather than quietly averaging it in. It is not an appraisal; when a lender or a court requires an appraisal, he coordinates an independent state-licensed appraiser, who applies their own professional standards to the same question.

The general point holds beyond real estate. Any average over a population that contains a distinct subgroup will misdescribe both unless the subgroup is identified. Reports that do not separate distressed transactions are not lying about anything; they are answering a question nobody quite asked.

The rest of the series is on the market reports hub.

Anthony Grynchal has been licensed in California since November 2009.