What makes a good “comp” for an appraiser? Are there certain guidelines appraisers have to follow when choosing comparable sales? Let me share with you five principles to know about stemming from the Fannie Mae Seller’s Guide (pages 597-598). This can help you understand some of the guidelines appraisers use when choosing comps, as well as give you some direction in case you are planning to share sales sales data (comps) with the appraiser during the inspection.
5 things to know about comps straight from Fannie Mae
- Bare Minimum: Appraisers must use at least 3 closed sales as comps.
- One Year: Comps need to have sold within the past 12 months, though an appraiser can make an exception if there is a good reason to use older sales (custom home, no truly recent competitive sales, etc…).
- Subject as Comp Four: The subject property can be used as a 4th comp if it sold recently. This might seem strange, but I’ve done this before when sales were extremely limited.
- No 90-day Rule: Appraisers do not have to use sales in the past 90 days. If there are better comparable sales (but older), the appraiser can certainly use those instead of using less similar newer ones. In fact, when speaking of comp selection, Fannie Mae gives the following example: “It may be appropriate for the appraiser to use a nine month old sale with a time adjustment rather than a one month old sale that requires multiple adjustments.” Of course many lenders do have a 90-day comp guideline, which makes it seem like appraisers need to use this guideline, but it’s really not a Fannie Mae rule.
- No One-Mile Radius: There is no such thing as a one-mile radius from Fannie Mae. Many lenders want appraisers to stay within a one-mile radius for comps in a suburban area, but that is NOT a Fannie Mae requirement. Appraisers should use the most competitive sales available. Bottom line. The question then becomes, “how far should an appraiser go for comps?”, but the better question is, “where should an appraiser go for comps?” Sometimes tracking down the best available comparisons means staying within a few streets, while other times it might mean traveling multiple miles away. A one-mile radius can actually be a dangerous way to search for comparable sales anyway because you could easily have many different markets within one mile (this is why I use the polygon search in MLS). When appraisers or real estate agents use the wrong sales for comparison, it’s easy to have an off-base value or price. If you want to gauge comparability, ask yourself the following: Would a buyer likely purchase this “comp” if the subject property was not available? Is this “comp” located in the same neighborhood or a truly competitive neighborhood? Do you think other people in the market would consider your sales as comparable to the subject property?
A quick video on the “one-mile radius” I shot a while back. Watch below (or here):
Private appraisals may be different: Fannie Mae and lender rules do not apply to private appraisals for divorce, estate planning, tax grievances, pre-listing, etc… Some of the guidelines are reasonable of course in that appraisers ought to use the best sales available, but otherwise appraisers do not wear the lender’s leash for private appraisal work. For instance, I had over a dozen divorce appraisals last month, and my reports didn’t have to explain to a lender why some sales were outside of a 90-day time period. I simply used the best sales to help illustrate the market. Bottom line.
Question: Any stories, insight or questions? Please comment below.
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else has sold at $350,000, the lower sale is probably more of an outlier than anything. This one “lone ranger” doesn’t establish the trend of values in the neighborhood or trump all other sales either because it’s not consistent with the rest of the data (even if it’s the most recent sale). This assumes of course there has been no big issue to cause a dramatic decline in property value. On the other end, just because one sale closed $50,000 higher than everything else does not mean the market is now willing to accept all other properties at that level either. Outliers can be on the low end and high end of the market.
Distressed sales: It’s important to sift through distressed inventory because these sales tend to close at lower levels.