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tips for choosing comps

Two appraisals with a 20% difference in value

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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.

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10 tips for pulling comps on a tricky property

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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.

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