The right comps make all the difference. How do appraisers pull comps? I scraped the surface of this topic a few days ago in a class I taught, and I wanted to unpack it a bit further today. There is sometimes a striking difference between how appraisers and agents approach this topic, so being on the same page a bit more will probably be an advantage. I hope this helps. I’d love to hear your thoughts below.
These following steps sound very detailed, but applying them is really a matter of making quick decisions during an MLS search.
7 steps when pulling comps in a neighborhood
- Start with Tight Boundaries: Pull sales and listings from the very immediate neighborhood first. It’s better to start out smaller rather than begin with a wide area such as a one-mile radius or an entire MLS area. I recommend using the Polygon tool in Sacramento MLS so you can actually draw exact neighborhood boundaries to be sure you are only getting data from those boundaries. After all, if you search by radius, you’ll inevitably pull in data that doesn’t really reflect the immediate neighborhood. Practically speaking, if you don’t know where to draw boundaries, just start searching as close as possible to the subject street, try not to cross major streets or school district lines, and keep an eye out for big age differences in the neighborhood since values might change for newer homes. Sometimes an aerial view on Google Maps can be helpful because you can see a clear difference where one tract starts and another begins because the roof colors are different.
- View all Recent Sales & Listings: Look at all sales over the past 3-6 months as well as current listings. This will help give you a quick understanding of the neighborhood price spectrum and which types of houses have sold at the top and bottom of the market. If there are few recent sales, be sure to go back one year or so for reference just so you are sure about what the market has done over time. For instance, if there are only fives sales over the past 90 days, it’s easy to miss the market if you only look at these sales. What if the these five properties sold too low? Or what if the most recent sales were lower in light of the cyclical real estate market (softer sales in the Fall). Remember that current listings might tell us if the market is different from previous sales. If the listings are higher, maybe the market increased. If the listings are lower, maybe the market has softened. Or if the listings are the same, but they aren’t selling, the market has probably softened. You can also look at expired listings also to get a sense of the temperature of the market.
- Use an “Apples to Apples” Approach to Search for Similar Homes: Now it’s time to dig into similar-sized homes. I recommend searching by square footage since that is what tends to guide most buyers. You can add and remove about 10% on each side of the square footage. This means if your house is 1800 sq ft, a good range is probably 1600-2000 sq ft. Of course sometimes data is sparse, so you simply need to work with what you have. But comparing something that is significantly different in size really isn’t a good methodology. In cases like that it’s probably better to use an older similar-sized sale rather than a newer and much different property. The key is to use an “apples to apples” approach, meaning you are trying to find the most similar properties to the subject property. If the subject property was not available, what properties would a buyer realistically consider purchasing? (that’s what a good comp is). If your house has three bathrooms, try to pull some sales with three bathrooms and a similar square footage. If you have a pool or converted garage, find other homes with the same feature. When the comps are very similar to your property, you don’t have to guess at how the market responds to upgrades or certain amenities because the proof is already there in the sales. Of course sometimes there aren’t any recent truly similar sales, so it’s important to go back in time to find something similar, or even search a different size of property in the neighborhood to understand how the market has responded to a certain feature. Once you find other sales of any size in the neighborhood with a pool, converted garage, or whatever you are looking for, you can then compare these sales to other similar-sized sales at the time. How much more or less did the house with the pool or converted garage sell for? This can help you glean some context for how much a particular feature might be worth.
- Search Older Similar Sales: Be sure to look back over the past year or so in the neighborhood so you can see what similar-sized sales have sold for. This will only take a minute in MLS, and it will help create a deeper context for you to understand the market. It can sometimes reinforce the strength of your list price or value to be sure your current price/value makes sense in light of historic trends in the neighborhood. If you are dealing with a custom home or unique location, you might need to consider sales over multiple years.
- Search the Expanded Neighborhood: If you started with very tight boundaries in your initial search, you can expand it a bit more. I’m not saying to go outside of what buyers would consider the neighborhood market, but only to maybe include more area if you didn’t already. If a buyer would typically search throughout the entire larger neighborhood, then look for comps in this larger area now. The benefit of starting out small is that you are sure to research value very close to the subject property, which helps you not pull in data from further away that might not reflect the immediate neighborhood.
- Pull from Outside the Neighborhood (if needed): If sales are really sparse in the immediate neighborhood, you may need to find comps in competitive areas. Don’t do this step first though because it’s important to understand values in the immediate neighborhood first (even by using older sales, current listings, and expired listings). Of course the problem is it can be easy to “cherry pick” higher sales from other subdivisions. This can happen on purpose or by accident. A different tract might sell for more or less than the subject tract, so exercise caution to study whether the other tract really does have similar prices or not. Would a buyer shopping on the subject street also be shopping in the other tract? Better yet, would a buyer pay the same price in both areas?
- Avoid Using the Wrong Price per Sq Ft: There is always a price per sq ft range in a neighborhood, so it’s important to not simply choose one random price per sq ft figure and use it to come up with a value or list price. For instance, imagine a 2500 sq ft house that sold at $500,000, which would make the price per sq ft $200 (500,000 / 2500 = 200). At times it’s easy to see the metric of $200 and begin applying it to other homes right away. Yet what if the other homes aren’t similar in size, upgrades, appeal, condition, or location? The reality is if I was pulling comps for a 2000 sq ft home, I might find out that similar-sized sales really have a price per sq ft range of $210-225K instead of the $200 figure that was only good for the 2500 sq ft home. This is an easy mistake to make, and it underscores how important it is to be aware of price per sq ft ranges in a neighborhood. Rather than impose a price per sq ft on a property, search similar sales to discover what the price per sq ft range is for that size of property.
NOTE: Obviously some appraisers might not pull comps exactly like this. After all, there isn’t a standard set of steps appraisers must follow. Do what works best for you, and if something here resonates with you, that’s great.
Question: Any other tips, insight, or stories to share? I’d love to hear what you do, whether you are an appraiser or real estate agent.