The myth of the one-mile radius in appraisals

It’s often believed that appraisers need to use comparable sales only within a one-mile radius. But that’s not really accurate or a good methodology for valuing a property either. Appraisers should really use competitive sales located in the neighborhood or a similar neighborhood – regardless of whether they are located within one mile or not. Besides, has there ever been a neighborhood in the shape of a one-mile radius anyway? That would be interesting.

The Danger of a One-Mile Radius: Take the following image for example in the northern portion of Oak Park in the Sacramento area. If I were to search for comparable sales within a one-mile radius of the red dot below, a return of sales from all sorts of neighborhoods would come back. Portions of Med Center, Elmhurst, Curtis Park, West Tahoe Park, Midtown and East Sacramento really don’t compare well with the location of the house (red dot) despite being within one mile. This example shows very clearly how inaccurate it can be to simply use a radius to measure a real estate market.

One Mile Radius for Comps - Sacramento Appraiser

Lender’s One-Mile Guideline: It’s true that most lenders have guidelines wanting appraisers to stay within a one-mile radius, but there is actually no official “one-mile rule” from Fannie Mae that appraisers have to follow. Of course, in a tract neighborhood with ample sales, there probably isn’t a good reason to use comps outside of one mile anyway, so that’s why lenders issue their own guidelines to say appraisers need to stay within one mile. But the appraiser can definitely travel outside of one mile if need be. Check out the video below (or here) on Fannie Mae’s guidelines for distance in appraisal reports:

Which comps should the appraiser use? Ultimately appraisers should utilize sales in competitive neighborhoods – whether those are inside or outside of a one-mile radius. Where would a typical buyer consider making a purchase instead of the subject property? That’s a critical question to ask when defining the boundaries of a neighborhood. In the case above, it would be highly important to stay as close as possible to the red dot in the photo, and not cross the freeway either because a typical buyer looking in Oak Park would not simultaneously be looking in Curtis Park, Elmhurst or other portions of Tahoe Park due to price differences. By the way, New York appraiser Jonathan Miller has an outstanding post entitled “What is a Comp?”

Why does this matter?

  1. Appraisers: Appraisers need to select the best comps in their reports.
  2. Not Bound: It’s important for everyone to know that unique properties, major fixers, historic homes, rural homes and oddballs are not bound by a one-mile radius.
  3. Resale Value: Sellers and investors need to understand the neighborhood and how appraisers are going to view the subject neighborhood too in order to gauge resale value. Be careful not to base your price on a superior tract nearby outside of your neighborhood boundaries. Check out a post on the importance of knowing your neighborhood boundaries.
  4. Giving Comps to Appraisers: When agents give “comps” to appraisers while at an inspection, it’s best to give properties that are actually located in the same neighborhood or at least deemed competitive in a similar neighborhood (as opposed to nearby sales that meet a certain price level). Moreover, the “comp” should really be similar enough that the buyer would have theoretically considered it as a replacement instead of the subject property. I had an agent give me “comps” recently and one sale was located 7 miles away from the subject property. While the subject property is a bit on the unique side in a standard subdivision, the sale 7 miles away was in a totally different and superior market – and therefore not similar at all.
  5. Zillow and Online Sites: Zillow has value for what it is, but doesn’t always understand the importance of tight neighborhood boundaries. See a previous post on Zillow and comparison to actual appraisals.

Any thoughts?

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Facebook, Twitter or subscribe to posts by email.

Comments

  1. says

    Ryan – very useful information for agents. I know I try to think like an appraiser when de-terming value for either a buyer or a seller. Thanks for the insite.

  2. says

    Great job Ryan! I’ve been working on a blog post about the same thing, but yours is way better than mines going to be. You sure set a high-standard to follow.

    Just curious, how’s your wife’s book selling? I hope it’s working out well. Have an AWESOME weekend!

    Michael

    • says

      Right on, Michael. I cannot wait to see your post. You do an outstanding job, so I’m confident yours is going to be great.

      Thanks for asking about the book. Didn’t I tell you I retired already from all the sales? 🙂 Just kidding. It actually hasn’t hit the market yet. It’s been on pre-order on Amazon and elsewhere for quite a while and it’s even in the Scholastic Book Club now, but it hasn’t officially hit shelves yet. That’ll happen next week on March 20th. We’re very excited as we’ve been waiting for about 1.5 years for this day to come. It takes so much time from finding an agent to shopping the book to actually hitting shelves. For anyone interested, here is her first book (second will be published in 2013): http://www.amazon.com/Seeing-Cinderella-Jenny-Lundquist/dp/1442429267

    • says

      Thanks so much. That means a lot and I appreciate it. By the way, a great wordpress plugin is “tubepress” to get videos to show up all on one page like I did on the navigation bar above when clicking “videos”. You keep up the great work. Go Ostrom!!

  3. Jeff Grenz says

    Many computerized models (like Zillow and even subscription services) inadvertently cross county lines, rivers, freeways and other value borders to grab inappropriate comparables, as the programmer had inadequate real estate understanding.

    It will take a lot more lines of coding to get close to the complexity of the human appraiser’s brain.

    • says

      I agree, Jeff. Machines can maybe win over humans in some things, but buying, selling and putting a value on real estate is very subjective. It’s such a crazy market out there too. It’s not even easy for humans to interpret. 🙂 Thanks Jeff.

  4. says

    Watch out there’s a ladder behind you! 😉 I loved that video – Steve chimed in, but it’s my turn. 🙂 You know Steve’s passionate on this topic and he puts a lot of care into his subject properties chosen, etc for his own items for his group he works for … I know many items are subjective, but the effort, experience and analysis is appreciated by the great appraisers that put their effort in the detail analysis (and we know you do). Great information for us to know, and sellers, about the supplemental standards. ~ BTW, the Ostroms so excited for Jenny’s book. I am so proud of her accomplishment. What a trip to see your book on a shelf in print. Amazing and to get into the scholastic book club, I’m spreading the word 🙂

    • says

      Heather, I also had a friend point out there is a bottle of liquor on the counter. I didn’t realize that in the initial video (it wasn’t mine). 🙂

      That’s one of the things that separates a good agent from others. Knowing the neighborhood and doing proper research. Kudos to Steve.

      Thanks so much for your support. It has been a VERY exciting week for us. I’m thrilled to hear about friends, family and strangers buying her book. A friend told me his daughter could not put the book down becaues it was “awesome” (the girl’s words). That was the highlight of yesterday for me. Thanks again.

  5. Rachelle says

    Well,,,we met with a realtor 2 days ago. We signed a contract and today she handed over “comps” within a one mile radius. I had to laugh. What she should we bank owned homes and a few flips. We all know how flips are done., cheapest way possible. As for the bank owned, pretty much nothing and usually sold as is. Our home is a Victorian style, 3 floors ,4 bedrooms. 2 full baths, huge walk-up attic. Hardwood floors throughout, 3 season porch, 20 x 10 foot deck off the back, with deck ponds. Landscaped beautifully, all perennials. Granite counters, mosaic tile backsplash. Baths are tiled and updated. Separate 1st floor laundry room, huge kitchen. dining room/ foyer. sitting room. This house is very beautiful. Now..the realtor hands me comps with prices of 160’s and these houses as I said, we in need of work, much smaller.. I did my homework and extended to 20 mile radius and I can tell you I found small capes, going in the 200’s, ranches as well and again, needing work, So I don’t agree with this one mile radius nonsense, Most appraisers here in Ct, don’t even bother to enter a home, instead just drive by or again go by old existing town hall info…. I don’t think either realtor or appraisers are doing sellers justice.

    • says

      Thanks Rachelle. I appreciate hearing about your situation. I guess we’ll see how the market responds. In your case I hope you are right that your home is far more comparable to others that are much further away. It sounds like that would be a good thing in terms of value. Best wishes.

      • Rachelle says

        You are not getting what I am saying, These comps that she pulled, are foreclosures and bank owned. Plus, with the radius of even 10 miles (instead of her one) the houses are smaller and do not offer anything as far as space, or anything, yet they are selling for more monies… Its crazy…

        • says

          Thanks Rachelle. Hopefully there are some better examples of normal sales that are upgraded. I was just thinking 20 miles sounds like a long distance unless you are in a rural area of course. I think the key here is proper comparison (and I realize that’s the crux of what you’re saying). A remodeled home ought not be compared to a beater bank-owned property. It’s just not “apples to apples” so to speak. I hope everything works out well for you.

          • Rachelle says

            Worked out well..
            Got out of the contract, citing displeasure of the way things were going. Took my own pics, put out the ad, bingo . 5 offers in 5 days. Got exactly what we were looking for. Goes to show, realtor is not always the best.. Best regards,,,

  6. says

    Fantastic Rachelle. I hope it’s a smooth process until the close of escrow. 5 offers in 5 days? It sounds like you were in tune with the market and maybe the agent wasn’t. 🙂

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