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.
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?
- Appraisers: Appraisers need to select the best comps in their reports.
- 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.
- 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.
- 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.
- 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.