Two appraisals with a 20% difference in value

My appraisal was 20% higher than the other appraiser. That’s what the attorney told me after I sent in my report. My first thought was, “Wow, I’m surprised”, and my second thought was, “Yikes, I hope I didn’t get it too high.” Long story short, the reason why there was such a huge disparity in value came down to comp selection. I chose properties that made reasonable sense for the subject, and the other appraiser chose homes that on paper looked like they could be the right ones, but in the end they were too low.

36955234 - woman making choice between city and country, on gray background

How can value be so far off? Well, let’s take a quick look at this situation and consider some key points for choosing comps. Even if you aren’t from the Sacramento area, what do you notice about my comps and his comps? (Note: I removed addresses and moved the subject property icon slightly to obscure its location).

comps

The Comps – Explaining why there was a 20% difference in value:

  1. Closer to Main Street: The other appraiser chose sales that were either on a busy street (Lincoln Ave) or closer to a main street (Fair Oaks Blvd). Of course it’s fine if sales with a busy location are used, but we have to consider if a value adjustment ought to be given.
  2. Court Location: This is a key point. If you look closely, two of the other appraiser’s “comps” are located in court-type streets off Fair Oaks Blvd. These “court” locations are subject to increased traffic noise from the main street, but they also don’t have the same feel as the subject street. The court location basically has only one street of homes instead of multiple walkable streets with a more traditional neighborhood feel. We have to consider if there is a value difference here instead of blindly calling these locations similar.
  3. One-Mile Radius: The appraiser’s sales are located within a one-mile radius, but that doesn’t mean they are reasonable for use. Just because a sale is within a mile doesn’t mean it’s automatically a “comp” (key point). After all, there is a difference between a “sale” and a “comp”.
  4. Older vs. Newer: Just because it’s a newer sale doesn’t mean it’s the best “comp”. Fresh sales are ideal, but sometimes older sales are more relevant – especially if they are in the immediate neighborhood and require less adjustments than new stuff that’s really less similar (I’m not saying we should pass up new lower-priced “comps” for older higher sales). In this case the other appraiser chose newer sales that were less similar instead of older more similar sales. The irony was there was an older similar property that closed 2.5 years ago on the subject street for 5% higher than the other appraiser’s current value. Since the market has increased in value over these past years, this one sale alone could have been a tell the appraised value was simply too low.
  5. Deep Study: It’s easy to value something in a tract subdivision with model match sales galore, but it can be tricky when working in an area where values differ tremendously from street to street. This is why it’s critical to dig deeply to find how the market really views the subject street and property. I recommend finding sales on the subject’s street (even if they’re older) and asking yourself how these homes compared to the rest of the market at the time of their sale. What sold at a similar level? This type of research helps us see the context of how the subject street might fit in the overall picture of value. Also, if the subject sold in the past (and it was a legit sale), how did it compete with other sales at the time? What did it really compare to? That might also give us clues into the market. The truth is we might need to look through years of sales in the immediate neighborhood and spend multiple hours crunching numbers and scribbling notes so we get a sense of the context of value. If you’ve only struggled for 15-30 minutes, chances are you need to keep looking and continue to make comparisons and seek out advice until you get a good sense of how value tends to work on the subject street and in the immediate area. Otherwise it’s easy to pick nearby sales and call them similar even though they might trend much differently.

I hope that was helpful. Please know my goal isn’t to say my appraisal was perfect (there is no such thing) or to throw another appraiser under the bus. I love my colleagues. In this case there was a clear value difference and frankly the other appraisal just wasn’t reasonable.

real estate blogginBlogging Class: This Thursday I’m teaching a class on effective real estate blogging at SAR from 9-11am. I’d love to have you come out. We’ll have two hours to talk shop and I really hope to give you ideas and empower you to go get it when it comes to blogging. Sign up online here.

Questions: What do you see about the comps above? Any other tips for choosing comps? Anything I missed? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

10 tips for pulling comps on a tricky property

The cookie cutter properties are the easy ones. But have you ever felt like you were just guessing at the value when dealing with something unique? Or maybe it seemed like you were throwing darts at a dartboard to come up with a number. What do we do when properties are different from the rest of the neighborhood? Let’s kick around some ideas below. I’d love to hear your take in the comments too.

pulling comps on a tricky property - sacramento appraisal blog - image purchased from 123rf

Here’s what I tend to say for how to pull comps on tricky properties:

  1. Deep Research: If a property is challenging, how far back in time have you looked? Sometimes we say things like, “I’ve scoured everything,” when in fact we’ve only glanced the past 3 to 6 months of sales. If we are dealing with something funky, we might have to look at years worth of sales to find something similar. Finding older similar sales is important because it helps us see how a challenging property fit into the local market. You can thus use older sales for research or include them in a report or CMA (and make an adjustment up or down depending on how the market has moved).
  2. Previous Subject Sale: Has the subject property sold before? If so, what did the subject compare to at the time? Finding comps for prior sales might be a clue into how the subject property fits into the context of the market. Of course it’s important to remember the previous sale might have closed too high or low.
  3. That One Feature: Often a home might be fairly standard, but what makes it difficult to value is an extra feature that is less common for the neighborhood. Maybe it’s a huge barn, accessory dwelling, or a studio above a garage. This is where we have to try to find something that is similar enough so we can gauge what the market has actually paid for that feature (since the cost of the feature might be way more than the actual value it adds). Remember, we might not be able to find something exactly the same, so we’ll have to be okay with similar, which is alright as long as we are looking at two things that are truly competitive. As an example, we might be able to find four neighborhood sales with accessory dwellings over the past couple of years and then compare those sales with otherwise similar homes (but without an accessory unit). As we start to compare prices, we can try to extract a percentage or dollar amount for what the accessory unit contributed to the overall sale, and then apply that in today’s market.
  4. Competitive Areas: If sales are extremely sparse in the subject neighborhood, where else would a buyer consider purchasing? You might try looking there for recent sales. Make sure the neighborhoods really are competitive though, and the way you’ll know that is if prices have been similar over time in both areas.
  5. Bottom & Top: Sometimes when dealing with a really funky property, we have to ask ourselves where the top and bottom of the price market is in the neighborhood. At the least this gives us some context for where the value of the subject property is likely to fit (I know, that might be a wide range, but it’s better than nothing).
  6. Ask for Advice: One of the best things to do when valuing a tricky property is to ask for advice. Seek out others who have valued something like that before and ask for wisdom. What did you do? Who did you talk to? Where did you go for comps? What challenges did you face?
  7. Target Buyer: It’s often useful to consider who a target buyer might be so we can gauge how that representative buyer might approach the property.
  8. Range of Value:  When a property is out-of-the-ordinary, it’s useful to see value in a range. We like to be so precise about value, but the best thing we can do at times is to give a range of value based on research. Thus instead of saying, “The value is $550,000 exactly”, we might say “A reasonable value range is $530,000 to $560,000”. This can work well for agents to communicate value for a unique home, but it can also work well with appraisers for doing certain types of private appraisals or consulting work where a precise value is not needed (a lender is going to want an appraiser to select a specific value).
  9. Test the Market:  You can do all your homework on a property and still not be sure the value is where you think it is. Sometimes when a property is unique, it’s good to go in with research or maybe even hire an appraiser, but at some point the property needs to be exposed to the market. After all, the market will tell you what it’s worth.
  10. Walk Away: On occasion the best thing to do is walk away from a property. Appraisers get this because we know we are not 100% qualified to value all properties. For example, I am not qualified to appraise the Capitol building in Sacramento, sports arenas, The White House, or a few hundred acres of almond groves in the Central Valley (not at this time anyway). Recognizing our limitations keeps us humble and it’s key for building credibility with clients. This also underscores how the best answer to value can sometimes be, “I do not know what it is worth. I have some ideas, but I think we need to test the market.”

I hope this was helpful.

blogging classBlogging Class I’m Teaching: I’m teaching a class coming on April 12 at SAR from 9-11am. It’s called “Successful Real Estate Blogging“, and I’ll be talking through the nuts and bolts of effective blogging. This will be extremely practical, and my goal is for you to take action (rather than just listen to me talk shop). I’d love for you to be there. See the attached image for more info. Let me know if you have questions.

Questions: Anything else to add? Did I miss something? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

How to pull comps like an appraiser

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.

choosing comps like an appraiser - by sacramento appraisal blog

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

  1. 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 pulling comps 2 - image bought and used with permission by sacramento appraisal blogdifferences 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.
  2. 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.
  3. 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.
  4. 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.
  5. tight and expanded search in tahoe park - sacramento appraisal blogSearch 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.
  6. 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?
  7. 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.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

5 things to know about appraisers choosing comps

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.

how to choose comps - sacramento appraisal blog

5 things to know about comps straight from Fannie Mae

  1. Bare Minimum: Appraisers must use at least 3 closed sales as comps.
  2. 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…).
  3. 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.
  4. 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.
  5. 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.

If you liked this post, subscribe by email (or RSS). Thanks for being here.