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Can you use comps from a different neighborhood?

March 1, 2018 By Ryan Lundquist 6 Comments

One of the questions I get asked the most is, “Can I use comps from a different neighborhood?” Maybe. But then again, maybe not. Let’s talk about it, and I’ll show you what I do when making this decision. Of course there isn’t just one right way to go about this. Anything to add? 

1) Compare sales over time: One of the most important steps is to compare similar properties in each neighborhood over time. If there aren’t many recent sales I have no problem going back year by year to compare older sales. That’s okay. Is there a price difference? Sometimes it’s very clear there is, so it’s probably not a good idea to use “comps” from a different neighborhood (unless I’m making a location adjustment). When looking at two areas I try to find a percentage price difference too where possible so I can say something like, “It looks like prices are 10-15% higher there.” This sounds time-consuming, but there’s no such thing as a 5-minute “comp check”, right? Nothing replaces putting in the time.

2) Let’s get visual: Here are a few visuals I made to compare two areas. Does it look like there might be a value difference? I know, you don’t know how to graph. Why not learn though? It’s an incredible skill to add to your bag of tricks. Here’s a video tutorial.

Truth: It’s easy to “cherry pick” sales from Elmhurst when in Tahoe Park or North Oak Park. Maybe it works out okay sometimes, but in other cases it could be a really bad move.

3) Word on the street: Talking with other real estate professionals about what they think can be insightful. Where are values higher? If you had a property in both areas, where would it sell for more? Of course someone’s perception might be off, but insight from other agents and appraisers can still be useful.

4) Crunch numbers: Why not run stats for both areas? Running the numbers might give us clues into how value works. If you don’t know how to pull stats, here’s a tutorial.

The numbers clearly show one neighborhood has higher prices, so I might need to give a location adjustment if I’m using a “comp” from a different area. For me I like to give location adjustments based on lining up neighborhood sales instead of stats like this, but I might still use these stats to help reinforce an adjustment I give. Let’s remember the market isn’t so mechanical to always apply the same adjustment either. Sometimes there are special properties that seem to buck the trend and ignore price differences (this is what makes value complicated). But in most cases I would be foolish to ignore stats like this and arbitrarily choose “comps” from an area with higher prices without consideration that there might be a location adjustment needed.

BIG CAUTION: If one area has smaller homes, heavy fixers, not enough data, more foreclosures, or more remodeled properties, we might draw the wrong conclusions when looking at stats if we’re not careful. In other words, we need to know how to think through the numbers rather than taking them at face value. For instance, in North Oak Park there are more fixers and some streets simply do not sell as high as others, so that might actually soften the stats a bit. I might also recommend pulling stats for the entire neighborhood as well as competitively-sized properties. This way we at least have two data sets and hopefully a little more balance. And of course do steps 1-3 above too.

I hope that was interesting or helpful.

Questions: What step do you think is most important? Did I miss anything? What else do you do or recommend? I’d love to hear your take.

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Filed Under: Resources Tagged With: choosing the right comps, comparing two neighborhoods, Elmhurst, Greater Sacramento Region, Home Appraiser, House Appraiser, how to make a graph, making a loction adjustment, MedCenter, North Oak Park, pulling comps, pulling stats for Sacramento, tips for pulling comps

Reader Interactions

Comments

  1. Joe Lynch says

    March 1, 2018 at 7:29 AM

    Your next post needs to be “Why do appraisers get mad when you use comps from different neighborhoods?” I see agents pushing value offer me comps from a superior neighborhood all too often. Us appraisers can’t ignore competitive sales in the subject’s neighborhood just to hit a number. There must be a good reason to go to a different neighborhood – the subject has an unusual feature, there is a lack of sales overall, etc.

    Reply
    • Ryan Lundquist says

      March 1, 2018 at 8:06 AM

      Pushing Value 101: Use sales from a higher-priced neighborhood.

      Well stated Joe. You nailed it. I hope this was a takeaway from the post, but I’m glad you said it clearly. Pricing mistakes can easily occur on the front end, a property gets into contract, and then an appraiser brings it in “low” because there is no support for the higher value. We cannot ignore all neighborhood sales and “cherry pick” higher sales from somewhere else unless there is a really good reason to do so.

      Reply
  2. Gary Kristensen says

    March 2, 2018 at 12:47 AM

    Great post Ryan to answering a complex question. My short answer is I would rather go back in time than adjust for location. However, if another neighborhood is the best sales data I have, then that is the best I have and my work is cut out for me to support any adjustment or lack of adjustment. In the end, I think it is best to use a mixture of comparable sales. Maybe one from another neighborhood if we need and maybe one that is a little older sale than we would like. That way the entire report is not riding on one location adjustment that could be a little shaky.

    Reply
    • Ryan Lundquist says

      March 3, 2018 at 4:11 PM

      Thank you Gary. Me too. I have no problem using older sales and then adjusting up or down depending on how the market has moved since this properties closed. The truth is we can get into quick valuation trouble when “cherry picking” sales from a different area. I hope that’s the idea readers leave with here rather than thinking it’s a great idea to choose comps from a higher-priced area. šŸ™‚

      Reply
  3. DeeDee Riley says

    March 2, 2018 at 9:08 AM

    Makes total sense Ryan. Thanks for the great into! Your graphs are really helpful!

    Reply
    • Ryan Lundquist says

      March 3, 2018 at 4:11 PM

      Thanks so much DeeDee. I appreciate it.

      Reply

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