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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Hey Ryan,
Interesting post. First, I know nothing about real estate.
But, if I understand correctly, for the house market to go up, buyers have to pay more than the appraisal. So , volatility is created through all cash buyers and folks tossing in their own money beyond the mortgage and required down payment. For the market to go down, people have to sell for less than appraisal. Yes? If true, then when buyers pay more, they are speculating that the market will go up rather than registering the current value of a property. If an appraiser uses this ‘bet’ in evaluating a comparable property, the speculation in the first property is incorporated into the second. But in the second, the valuation isn’t saying ‘we thnk this home will be worth more’, it is saying it is worth more. It seems like a self-fulfilling prophesy.
And, I still do not understand why a fresh assessment from the county can be very different from an independent appraisal. Hope I don’t seem too thick. Never was a business whiz.
best to you,
ricardo
Ricardo, thanks for the comment. I always appreciate your insight and questions. You bring up an issue that is on the minds of many people. I would say demand in the market increases and decreases, which is something appraisers simply have to recognize. This is opposed to appraisers having some sort of market conch to help values move up or down. Some people think appraisers are the force that drives the market, so you hear things like, “The market can only go up if appraisers make it go up”. But that’s not really accurate and it’s not a good way to look at real estate. Appraisers are more like a measuring stick for the market instead of a gas or brake pedal. There are many forces that drive a real estate market such as interest rates, affordability, supply, demand, the economy, etc… This is why I am a fan of the multi-layered real estate cake analogy because it helps describe this phenomenon so clearly. https://sacramentoappraisalblog.com/2013/09/11/the-multi-layered-cake-analogy-in-real-estate/
The market is already moving up or down (or it is stable) by the time the appraiser gets to the inspection. The appraiser simply has to recognize what the market is doing and account for it in the appraisal (which is why a property can be appraised for more or less than a model match that sold one month ago). If for instance housing inventory dropped 50% in one month and interest rates hit 2%, prices would skyrocket to the point where the older sales really wouldn’t represent the market anymore. Buyers would hands-down pay more for today’s properties. The buyers are not necessarily speculating either. They are paying based on what others are willing to pay in the moment. For example, last year buyers were willing to offer $20K+ above list price, but this year the market has changed, so that’s not how every deal is working out. Buyers have more control right now than they did last year. At times prices might be inflated in a market for whatever reason, but buyers are willing to pay those prices, which makes it seem real. Hindsight makes it seem ridiculous to have paid those prices, but paying those amounts was very real in the moment. Appraisers don’t have to agree with whether a person should pay a certain amount for a house, but simply gauge what a reasonable value is for the property. Prices were out of control in 2005, but people were willing to pay them, so the values were legit (unless there was fraud of course).
There are so many reasons why an assessment could be different from an appraisal. Assessments are often based on January 1 of the given year, while an appraisal can be done at any point. Most importantly though, the assessment is often a reflection of the value of the assessed value of the house when it was purchased (this is called the Prop 13 or “base year” value) plus 2% each year. This means if you purchased in 1980, your assessed value could be substantially lower than an actual appraisal today. There are other cases where it takes the Assessor a while to catch up to the current market (so your assessment will be low for a season until the next year when they get caught up to speed). See here: https://sacramentoappraisalblog.com/2012/08/03/why-is-your-recent-purchase-assessed-so-much-higher-than-the-purchase-price/
If you have a specific scenario about assessments, let me know so I can maybe speak to that. There are so many different situations.
Hey Ryan,
Nice article. How about a companion piece about what are not comparables? Homes selected based on price, not similarity, distressed asked, etc…..
Joe, that’s a great idea. I smell a future post. Thanks for the idea.
Ryan, I like to educate agents on these very points because if they understand the criteria we go through in the appraisal process they will be better able to price their homes for listing and hopefully there will be less of a chance an appraisal will come up short.
Well said, Tom. I agree.
Ryan:
Thank you for the thoughtful lesson. I think you are an excellent teacher who provides much food for thought. If I am correct in my understanding of what you said, the market is like a flock of birds or school of fish wheeling and turning in the ocean of the greater economy. Why it turns or whether the direction makes sense is not your concern so much as the direction at any point in time.
Thanks for taking the time to teach us.
Ricardo
Ricardo, you are a poetic man. I like your analogy. I think appraisers are concerned with why the market is turning as well as trying to figure out how much the market is turning. Whether buyers willing to pay such high prices is sustainable or even whether it seems like it makes good financial sense for the buyer is another story. An appraiser may feel a bubble is building in a certain market or is about to burst, but a typical buyer still may be willing to pay those high prices at the moment. Make sense? If not, let me know. I always appreciate conversation with you Ricardo.
Oh, your instruction does make sense to me. To extend the analogy, sometimes fish are schooled by low swimming orcas blowing bubbles. Once frenzied, the fish are devoured by whales. But what you are saying is that the appraiser is a fish watcher not a whale watcher.
At the end of the day, considering that housing is a basic necessity, it’s sad that this is provided by a speculative market that has such potential to harm people. Anyhow hope you and the L Fam are enjoying thee lovely days.
Ricardo
All I’m saying is I don’t eat fish, but I do enjoy fish sticks on occasion. 🙂 Interesting thought Ricardo. Housing is a basic necessity indeed, but it’s such a money maker for many people playing the real estate game. Unfortunately when values get so high, buyers can no longer participate in the “American Dream”. Affordability (and jobs) are going to be key for the unfolding market now that cash isn’t driving the market any longer. We are doing very well. Thanks.
hi Ryan, I have a quick question for you. Can an appraiser use a comparable that was an all cash offer as a comp?
I work in a neighborhood as a real estate broker where one home went way above the others that have sold because the offer was all-cash. Can I now use that all cash price as a pricing marker for pricing future listings so that they will appraise? Thanks!
Hi Denise. Thanks for reaching out. That’s a great question. An appraiser can use this sale as a “comp” in a report if needed, but the big question is whether this sale represents the market or not. If it’s really a “lone ranger” so to speak, the appraiser can use it and give an adjustment downward or give less weight to this sale. If this property does reflect the market, then it’s a solid comp. From your comment it sounds like this property is an outlier though that does not really make sense when looking at the rest of the neighborhood market. If that’s the case, the “comp” should be ignored because it closed at an unrealistic level. One sale does not make a market, so if the market really is that high, there should be other support to substantiate a high value. The same is true for the low end. If there is one extremely low sale, the market is not all of the sudden bound to that low level. We have to see the overall picture of the market. That will tell the most compelling story. This happens with cash sales quite a bit. There are many reasons why a cash buyer might choose to pay above anything else. This is why appraisers need to know the story behind the sale of each sale. It’s never just about the sales price or square footage. Appraisers essentially have to diagnose each comp to gauge whether it sold at a realistic level or not. This is also why appraisers should not blindly use private sales that closed off MLS. If the appraiser doesn’t know the nature of the transaction, it’s really a blind comparison. Maybe a cash buyer paid too much. Or maybe the house sold at a higher level because furniture or vehicles were included in the sales price. Does that make sense?
One more thing. Every seller in the neighborhood of course thinks of this new sale as setting the price, but the market will determine whether they will pay at that level or not in the future. Just the other day an appraiser friend was telling me of a similar situation. A property closed at $420K, but everything else was at $350K. There was no support at all for the $420K in terms of listings, pendings, sales, or other market data. Value was clearly at $350K, yet I can see the allurement of wanting to list at $420K (I would love that as a home owner). Good appraisal methodology will sift through all the information and recognize where the market is at. Of course you might have someone come along and rubber stamp an appraisal at $420K, but that’s really too bad.
I recently took a CE class and was told by the instructor that if I used a comparable that I had performed an appraisal on and know the correct gross living area that I had measured the property to be, that I could not use the GLA that I had measured the property but had to use the GLA as stated by the MLS because that is the GLA that other appraisers would be using. Is this correct? It just does not sound right to me. Thanks
Hi Ronnie. Thanks for checking in. What is the source of the instructor’s rule? I’m not aware of anything from Fannie Mae or elsewhere that says we should only use the square footage as listed in MLS. What if the square footage in MLS is incorrect? (which it often is depending on the area). I have no problem using the correct square footage if I know the correct square footage. That seems most prudent, and I would rather use the correct square footage in a report if I have access to more correct information. We don’t exist to please and appease Collateral Underwriter. We should be as accurate as possible. Any thoughts?
Is it legal to use a comp that is located in a different County even though it might be the same distant in regards to the other comps in the County the appraised house is located at?
Great question. It’s not a legal issue at all since appraisers don’t have to legally use certain comps. Appraisers should simply make the most relevant and realistic comparisons. However, the question becomes which sales are really most comparable to the subject property. I would wonder why an appraiser would pass up using sales in the immediate neighborhood in the same city or county in order to use sales in a presumably different comunity. Is there a compelling reason? Are values similar in both areas?
I had 6 comps. (1) on market still. Range was 430K-840K. The 430K is the one in a different County with different soil/rocks. (foothills). The other 5 comps were comparable’s in my area with a range from 517K – 840K. I was guessing around 650K for the 20 acre piece I have. My house appraised 3 years ago for $525K and now came in at $550K. It just really didn’t make since to me.
That should have said *Sense*
Thanks Kathi. Appraised value really hinges on comp selection and adjustments. There is always the possibility too the value was not on target a few years ago too. It sounds like in the current scenario you’re saying the value was reconciled to the low end of your market though. I hope if the new appraisal is low, that it has not damaged a refinance or whatever you’re doing. Best wishes.
Hi Ryan, I really enjoyed reading this article and also liked the comments by Ricardo. I would like to ask about how you would find the appropriate sale price range for this particular situation. I am looking at properties on a particular canal next to a bay in Florida. There are 36 properties on the canal. 21 of those are vacant properties. There are several properties for sale on MLS, several that have been listed and delisted many times over the last several years, and several that are privately for sale if you contact the owner but they are not listed on MLS. All of these properties are roughly equivalent in lot size, some have seawalls and some do not (but need them to prevent erosion).
There was a single sale in 2016. The sale was in March and was a vacant property with a seawall. It sold for $42,000.
There were no sales in 2015 other than a $100 sale which is undoubtedly really just a deed transfer situation like parent to child or something.
In 2014, there were three sales including a house in February that sold for $70,000, a vacant lot without a seawall for $45,000 in August (bought by flippers who immediately listed it for $74,500 but have not succeeded in selling it yet), and another house in August that sold for $125,000.
I do not know if it is worthwhile to go back to 2013 or farther to look at sales. This situation is peculiar because there are no similar canals within many miles.
What I find really telling is something that I do not know if appraisers consider but it seems to me very relevant–which is, do appraisers consider comparable listings that have not sold?! In other words, there are many properties on this canal that have been for sale during the recent months or years and that have not sold. Would this be an indication that these properties are priced too high?
For example, several of these owners and their real estate agents have decided that their vacant lot is worth $74,000 or more but they have not managed to sell their lots. I think it is rather obvious that $74,000 must be overpriced then. One such lot was listed for sale in April 2015 for $78,000. The price was then dropped to $74,000 in September 2015. It still has not sold.
There is also the flipper property that I already mentioned. They seem to be real estate agents in their nonflipper lives but still have not managed to sell the property that they have had listed at $74,500 since October 2014. It still has not sold.
Another vacant lot on the canal was listed at $159,000 in April 2015 then decreased to $144,000 in September 2015. It never sold and was finally delisted in February 2016.
The last vacant lot officially up for sale has been listed and delisted countless times in the last decade. The first time was in May 2010 for $250,000. It never sold and was relisted in July 2011 for $175,000, delisted and relisted in January 2012 for $175,000, delisted and relisted in January 2016 for $100,000. I spoke to this man and when I expressed that $100,000 was more than I was willing to pay for the lot, especially given its condition (one-fifth of the land has eroded compared to the official acreage because he never built a seawall and the county generally refuses to allow the land to be reclaimed because it would set a precedent). The man told me very aggressively, “Well, what do you expect waterfront property to sell for!) as if he were sitting on a goldmine or something. I did not respond because I could tell it would start an ugly encounter but what I wanted to say was, “Uh, apparently in 1988 it was worth $8,000 because that is what you paid for it then.”
As you can see, the actually sales of vacant lots have been for between $42,000 and $70,000 since February 2014, with the most recent one being the $42,000 sale. Many lots are priced for sale for $74,000 and over but none of those have sold despite some of them being on the market for months and even years.
Does the fact that these properties are not selling when they are priced like this factor into appraisals or not? As a buyer, I should certainly consider it though right? Basically, if I as a buyer choose to buy something at a price other buyers are mostly unwilling to buy at, then that would be foolish on my part right? Shouldn’t appraisers also consider this?
It is a really strange thing going on with that canal because most of these people bought these lots for really, really cheap prices in the 80’s and 90’s but then during the housing bubble, the lots started selling for small fortunes so I think the owners got the idea in their heads that they should make a fortune on their properties and they just refuse to sell for less. Of course, that is their prerogative. Certainly, if they don’t need to sell and if they are willing to pay the taxes year after year, they can just wait to get the price they want or they can keep the properties until they die if nobody wants to buy at their prices.
But I think it is a sort of funny example of how people have gotten accustomed to the idea that buying land or a house is something that should net them a profit or a fortune at a later date. Many people do not see the housing bubble as an aberration. Rather, it seems they think that the housing bust was an aberration and if they just wait out the bad times, then their property will sell for bubble prices again. Many sellers seem to think that the bad times are over and they should get bubble prices for their properties. If they can’t get those prices then they would rather sit on their land/home like a hen on a rotting egg then sell it for less than the fortune they think they deserve.
I could understand this attitude if these people had themselves paid a fortune for their properties during the bubble and are looking to recoup their investment. But the majority of these owners all bought (many inherited) these properties for $20,000 and less at a time before the bubble. Yet, they are demanding bubble prices and refuse to budge even though it means they are sitting on properties they never even visit. About half of these owners live out of state. More than one told me that they don’t use it anymore for various reasons like they got too old. Two sounded to be on their death beds and never use the land even for docking a boat anymore.
The psychology of buying and selling it really fascinating. The bubble prices of 2003-2007 really brought out the avarice in people. They want their chance to fleece somebody else and if they have to wait ten or twenty years to sell to do that, they will. I mean I think some of these people would burn their houses rather than sell them for a reasonable price even if that price is double what they paid for their house!!!!!
I tell you, I really think another housing bust is coming. I am perfectly willing to pay a fair price for these properties. I have generally been adding at least $10,000 to the price they paid for their properties as my starting bid. I would bid up from there. But that is not enough for them. They want to make 10 times or more than what they paid for their properties. The fact that nobody is buying does not seem to phase them at all. They are absolutely self righteously convinced that they deserve to get rich off their properties.
I will tell you what…when the bust comes, I am not going to feel sorry for any of these people. They want to take total advantage now so I will be happy to turn it back on them when the time comes. And if I sound angry, it is because I am. I should emotionally detach but some of these people have been just downright nasty on the phone. I was trying to be really nice to them but they are just rude. One of their agents was pretty cool. I mean he did not insult me or yell at me when I explained to him that the property price was more than I was willing to pay. The others have given me false comps, which I knew were false because I literally researched EVERY SINGLE one of the 36 properties on the county website for sales figures. These people are so desperate to get rich that they lie about sales prices that never happened, they try to bully or use pressure tactics. It is really quite amazing. I lost interest in the properties at all because I couldn’t imagine having such a bunch of despicable people as neighbors.
Now I am looking at other property in the county and neighboring county. But I find it to be a really interesting exercise to investigate one particular community. I will probably continue to track it in the future to see what happens with sales/foreclosures along the canal. It is kind of fun to watch one particular situation as it develops over time.
I wonder if what I have seen looking at real estate on this canal is something other people are seeing right now other places? Is another bubble building? What is causing it? If so, when is it going to burst? And are sellers greedier than they were 30 years ago as far as seeing their properties as something that should make them filthy rich (unless they bought during the last bubble in which case they generally are content to just make back their investment).
Oops, correction, the $70,000 sale in February 2014 was a vacant lot.
Hi Nnya. Thanks for the comment. Wow, that was a long one. 🙂
You are smart to look at the listings and consider what the market is saying if they are not selling. As an appraiser I absolutely pay attention to this. I would recommend being in touch with how long it takes to sell of course. In some markets it might take quite a while, but in other markets (or sub-markets) it could be very quick. If these properties are clearly being marketed at a level that is too high, then it might tell us something about the market. I won’t speak in definitive language here because I don’t know your market, but when properties don’t sell, it often says something about value. The public often gives strong weight to listings and newspapers like to proclaim record prices for high listings, but it doesn’t actually mean much until it sells. Ultimately if the listings don’t sell, they were merely on the market instead of in the market (Jay Papasan). Some owners don’t really want to sell though because they don’t have to. If you really want to live in this area, you’ll have to ask yourself what the owners are going to listen to. Will they be reasonable at a lower price if value really is lower? Will they listen to a credible appraisal? Or will the owner simply not sell unless that price is met? That’s the key.
It is reasonable for there to be a range of value in the neighborhood depending on lot size, location, quality, condition, etc… I am not surprised to hear different prices.
Hi and THANK YOU for your informative article. In 2010 I was very ill and unable to negotiate complex transactions on my behalf, or the behalf of the small real estate holding entity of which I am president and 50% shareholder. Our attorney was paid to negotiate these things on our behalf and the potential buyer/lessee had an appraisal performed by a certified appraiser. The real property in question housed a fully improved turn key, 175 seat restaurant/wine bar with sales potential easily exceeding 2M per year. In addition, sales in our same block of 2 UNIMPROVED properties that needed full renovation (installation of commercial kitchens, walk in refrigeration, HVACR, 600 amp commercial electrical service, commercial gas service, code compliant restrooms, staircases, secondary egresses, other safety measures, etc.) were appraised at 230.56 and 202.08/s.f. in 2008 & 2007, respectively. The appraiser used 7 other comps, only 1 of which was in the same zip code, and that was a less desirable property without many of the amenities of our turn key operation, which sold for 193.51/s.f. In addition, due to the fixed service space requirements for all such businesses (kitchens and other service areas), our building was a consolidated 2 building parcel with 2.5x the square footage of any of the other properties listed and approximately 3x the seating capacity the other properties could accommodate due to fire and building code regulations, etc.
I think the appraiser, acting on behalf of the potential buyer/lessee, used other properties, some of which were lunch only businesses 3-13 miles away, only able to do a fraction of the sales volume of our concern, while we offered brunch, lunch and dinner. I think the appraiser used these comps to water down the value of our property, and valued it less than the average of all 9 comps. I would now argue these were not comps at all and statistically do not fall within the probability curve of pricing for comps in our immediate area that needed complete gut and rehab as noted above, yet still commanded 193 to 231/s.f. This was in a DOWN market. The comps were from 2007-2008 with 2 from 2009 (most more than 2 years old and when real estate of our type in our area was at the bottom of the valuation curve).
The appraiser yielded a value of 142/s.f. for our property, which was 20% below the average value of all 9 comps and 32% below local comps that were 2+ to 3+ years old for the 2 buildings in our same block, and 1 a mile away, all of which required full rehab as noted to operate. Two of the comps he used sold for 100 and 113/s.f. and were so inferior to our property in location, retail sales potential and history, that it was like comparing a brick shell to a high volume 14 year old established business with a full bar every night and sales exceeding industry averages by orders of magnitude some years, but always exceeding industry averages by double digits even in “off” years.
This resulted in a valuation that was so skewed we had a neighbor post lease offer us 1M in cash to start but we were contractually locked into our current tenants (we let the property to our existing tenant and our attorney foolishly established a rent of under $10/s.f./yr., which was the going rate for warehouse property in an industrial area to our east. We are in one of the most desirable areas of our city with very high real estate prices.
This was born out when a very conservative bank appraiser just re-appraised the buildings in 2015 for 263% that of the 2010 appraiser and the 2015 appraisal was ordered by the bank at our request. This is an established area and real estate values do not increase 263% in 5 years. Shoulda, coulda, woulda, but I had and have a recurrent systemic infection which affects my central nervous system to the point sometimes I cannot find words for simple sentences and require hospitalizations and IV antibiotics. I am not making excuses, but our attorney and that appraiser are what now stand between me and a comfortable retirement because he also added 2 – 5 year lease extensions. The first 3 years of the lease did not even meet our carrying costs of the real estate and improvements and were 50% to 20% less than our business was paying in rent in 1998, which was 10% below market rate THEN. The lesson is that if you are unable to negotiate for yourself (my partner signed on the line and could not be bothered to read the appraisal, sales price schedule and the lease) find someone who can, otherwise you stand to lose hundreds of thousands of dollars to millions of dollars over the term of a lease. The mistakes made by our attorney who is with a highly reputable business law firm are mistakes that I as a small business entrepreneur would not have made had I been mentally able to process all the data including the appraisal and lease at that time. The comps are based upon real sales prices and rents so these are not pie in the sky expectations. To give you the real numbers, the appraisal in 2010 was 685k from the private appraiser (>300k less than we had invested in cash, mortgage principal and construction loan in 1998-99) and the appraisal by the bank’s appraiser, using comps from our area, was 1.8M for the real estate only. The 2010 appraisal SHOULD have been comfortably over 1M had the appraiser excluded properties valued at 100 – 150/s.f. that were not in our area, our market, required hundreds of thousands of dollars in improvements just to open, not turn key establishments. In my mind he certainly was not justified to value our property at 142/s.f. when 6 of the 9 comps were essentially shells and the overall average including these 6 shells was 168/s.f. If anyone in the legal or real estate community would be interested in learning more and perhaps helping me seek recompense I am not averse to suing the appraiser, the attorney, etc. Don’t make my mistake, even if you are sick and in the intensive care unit unable to negotiate on your behalf. And no matter how much you trust your business partner, if he/she has no interest in finance and just wants to do whatever is easiest regardless of consequences it is required that you take any and all actions necessary to prevent such negligence by someone you thought you could trust. I built those assets and that business and it’s real market rate revenue potential was stolen from me due to lazinesss and incompetence. Choose your partners wisely and make sure you have at least a 51% share in the operation so this does not happen to you.
Wow Ed. That’s quite a situation. I’m so sorry to hear how that went down and I appreciate you sharing too. I wonder if the appraiser in the past was familiar with your area or the type of property. It’s a wonder what was happening if value really was so much higher. I’m not trying to advocate at all for the old appraisal or the appraiser, but I will say the benefit of hindsight can make it far easier to value something. For instance, in today’s market I might have very little data to work with, which can make it complex to see the market. Yet if today I am putting a value on something years ago in the past, I actually have the benefit of looking through years of market trends because the market already happened. Again, I’m not excusing a bad appraisal, but only mentioning an important element here for the sake of conversation and any onlookers.
Man, that is some wisdom right there on having a 51% ownership. Again, I’m so sorry to hear you got burned.
I hope you are doing better physically nowadays.
ADDITIONAL INFORMATION: the comps on my block that require gut/full interior construction were cash offer sales by two different buyers who approached the owners when the properties were not even on the market. We were not interested in selling in 2007-2008 then I got very ill and we had to either let or sell our property, which we let.
Hi, I realize this blog is a bit old, but I was hoping for some help. How about comps that were “flipped”? As an example, my appraiser used two houses that sold in 2015, and then again in 2016. The sales from 2015 were estate/sheriff’s deeds and likely were auctioned off. I am not sure what type of work was done to the homes in the mean time, but they were sold again less than a year later. I am assuming that these houses are low for my market because they were flipped and priced to sell quickly, not at market price. I believe these items should not be included, but wanted to get some info.
Hi Jennifer. Thanks for reaching out. I guess the key comes down to whether these homes are comparable or not. It doesn’t matter what they sold for in the past per se. Sometimes homes sell quickly too because they are nice (rather than being priced to sell quickly (too low)). What matters most is what condition they are in right now, what upgrades have been done, and whether the most recent sales are reasonable market sales or not. I guess one way you might know if these sales were legitimate is if there are other sales in the neighborhood that are higher, lower, or the same price. If your home is remodeled and these two sales sold at about the same price as other remodeled homes, it’s hard to say the flips don’t represent the market then. What story does the market tell? That’s always a question I’m asking. It is perfectly okay for an appraiser to use two sales that were flipped as long as those sales are a reasonable substitution for your property. There is no rule against using flipped homes. Like any “comp” though, we have to really be in tune with the property and ought to be cautious about using a sale if it really isn’t a good representation of value (sometimes properties sell for too high or too low). Anyway, I feel like I’m rambling. Keep me posted if you have any follow-up questions. Thanks again for reaching out.
I perfectly understand what you are saying and I completely agree. I believe these sales are extremely low for the neighborhood, however, the homes themselves are very similar in style/size/functionality. The home directly across the street from me, which is also almost identical to mine and to those other comps just sold for $97k, and the other comps were in the mid 80s, whereas the other two comps that were used sold for only around $78k. I don’t think they are a true representation and I think it was the “flip” that caused the discrepancy. Again, I am not positive they really even were flips, but I don’t believe they are true representations.
I appreciate you getting back so quickly! This information is helpful.
I hear you. Well, if there are other sales out there, hopefully you can find them. Of course the appraiser may have seen them and had a good reason for not using them. If not though, maybe the appraiser would consider them. We always have to know the story behind the sales. We cannot simply blindly use sales without considering whether they were reasonable market sales or not. Best wishes
Hi there,
I would like your opinion. My client bought their New Construction Home 11/2014 for $620k. The builder had lowered the homes to sell inventory and many sold around that price. The builder started raising prices since and most sales are in the $775-$850 range all still the same year built 2014. We have a model match that closed 8/4/16 for $905k. There are no resales in the neighborhood. I just got my appraisal back for $620k. All comps are outside the development, and houses all 12 years old or older. The neighborhoods do not compare at all.
The Appraiser says “he’s not allowed to use any of the sales in the neighborhood because they are builder influenced”.
I feel he is comparing a Maserati to a Honda. We are trying to do a cash out Fannie Mae refinance. Any advice?
Hi Lissa. Thank you for reaching out. This is a challenging situation. On one hand the appraiser has a point because the sales could very well be builder influenced. Let’s be realistic that sometimes builders pad their sales with concessions and incentives so the prices are much higher than they would be had their been no extra incentives to get buyers to buy. In short, they control their market so it ends up selling much differently than the rest of the surrounding market. For example, a housing development I know of had 100K prices differences between the homes with concessions and without. Was the market really willing to pay those high prices if there were no concessions (money back, free upgrades, covering closing costs, etc…)? The proof is in the market. Are there any high sales without concessions and padding from the builder? On the other hand I wouldn’t go so far as to say appraisers are not allowed to use those sales. In fact, when someone states a rule, I always like to ask where that rule is coming from to be sure there really is a rule. In this case there is a sentiment in the industry that builder sales really aren’t arms-length sales. I get that, though if we throw them out we better use sales that are really comparable. I get why an appraiser would say this, but in my mind it’s important to pay attention to the builder sales and it’s okay to use them if needed (but to also make adjustments (and use some sales outside the development too)).
You know what the best comps actually are? Not the brand new ones. We really need to see what older sales have sold for: 2013, 2014, 2015. How are these previously brand new homes trending in the resale market? That will tell us the most about value. That isn’t easy for home owners to swallow, but the “old” sales are probably a better picture of the market than the new ones. Since your client’s property is no longer new, the best comps are probably the resale homes in the development rather than the new ones. There can be a huge difference in value between “old” and “new” sales. It’s like that brand new Maserati vs. the 2014 model. We would all pay more for the new one because it has never been driven before and there is that brand new car smell. The same thing happens with homes. This is an important consideration so we are not blindly comparing your client’s 2014 model with the brand new ones from the developer. There could be an enormous disparity in value. I have a post I wrote about this here: https://sacramentoappraisalblog.com/2013/12/17/why-its-important-to-think-of-new-homes-just-like-new-cars/
The appraiser has to ask himself if the “comps” chosen are really trending at the same level as the immediate subject subdivision or not. Moreover, was the previous sale not legit or has the market seen no value increases so it is justified that 620K is an accurate value today as it was nearly 2 years ago? For reference, I would be curious to go back around late 2014 and look at the neighborhood where the appraiser chose his comps from. Were values at $620K at the time? If not, maybe at the least you can figure out how much the market has increased since that time by comparing the older sales with today’s sales. You might also be able to see if there was a price difference between the subject subdivision and the one where the “comps” are coming from too. That may be a clue into the market if there is a large disparity in price over time. Maybe the market is willing to pay more or less in one area (though let’s not forget brand new homes may have inflated prices simply because they are new and if builders are controlling the market). I would also like the appraiser to consider the rise in prices in the subject neighborhood. If buyers are paying substantially more right now, why is value the same?
I hope that helps. Any questions?
One big issue that can completely skew an appraisal is using a comp(s) from 0.75 miles away but from completely different neighborhoods. This is especially important in dense coastal cities like Los Angeles where 0.75 miles can mean the difference between an upper class neighborhood with great schools and the gang infested ghetto. Being able to walk to the beach, or having to drive. I’ve noticed appraisers that come from inland suburban areas of SoCal simply do not understand these nuisances.
A simple solution to this would allowing use of elementary school ratings to make adjustments. After all buyers are absolutely taking school ratings in consideration. In some cases it’s the primary reason they’re interested in a property so it seems foolish this is not considered within an appraisal.
Thanks Jon. I appreciate your take. You are so right about knowing the nuances of an area. I also agree about the importance of school boundaries, though sometimes an area does not have great schools, but values are still high. In these cases where the assigned school happens to be subpar, residents send their kids to private school (because they can). In an ideal world we would select “comps” in the immediate neighborhood that are also within the school boundaries. That way we don’t have to even try to figure out if there is a value difference between one school/district and another. With all that being said, sometimes school boundaries are overlooked or unknown by appraisers, and that’s a problem that could make a real value difference.
I actually wrote a post talking about the importance of school boundaries in case it’s of interest. https://sacramentoappraisalblog.com/2016/06/06/how-school-boundaries-impact-real-estate-values/
Thanks again.
If I have 6 comps, which 3 or 4 must I choose. Can I pick the highest 3 or must I use an average or median price
Hi Patrick. Thanks for reaching out. I am not sure if you are a home owner or real estate professional, so it’s hard to give advice, though I’d say this. Choosing comps is about finding the most similar homes, and not every “sale” is really a “comp” either. Which of these six sales are really the most similar? I would focus on those ones the most and give less weight or no weight to properties that just aren’t competitive. I would not average the sales at all, but weight them (keep in mind buyers don’t average sales when making offers either). As I said before, I would give more weight to the ones that are similar and less to the ones that aren’t. I wrote a post about how appraisers choose the final number and there may be more about that here: https://sacramentoappraisalblog.com/2014/02/27/how-do-appraisers-choose-the-final-value/ In all of this though let’s remember one sale does not make or break a market, so if there is one that sold above everything else, maybe it’s an outlier more than an indicator of value. This reminds us to look at all sales and then see if we can find a few or more to help paint a picture of value for a property (rather than just one high or low sale).
Anyway, let’s keep the conversation going. If you have follow-up questions for a more pointed discussion, I’m happy to talk shop. Thanks.
If an appraiser has difficult finding relevant sales for an appraisal, what would you suggest the appraiser do?
Hi Christine. It’s tough because sometimes there aren’t any perfect comps, so appraisers have to do the best they can. In other words, if a property is an oddball, any appraiser is going to struggle with comp selection. With that said, appraisers can always go back further in time to find more similar sales or go out further in distance. I would certainly do that. Ultimately if an appraiser feels a credible value cannot be established though then it’s probably best to withdraw from the assignment.
Is it better to go a farther distance or farther back in time when there are no similar comparables in the area?
Great question. I think it’s important to do both. I don’t think there is one right answer here, but personally I prefer to go back further in time first so I really understand the neighborhood. Moreover, if there aren’t any recent comps it makes sense to me to go back further first so I can compare older sales with other areas at the same time to be sure how the subject neighborhood really fits or compares to other locations.
Ultimately if I only go out further in distance I’m missing what could be necessary historic context to understand the subject neighborhood. But to be fair, if I only use seriously old sales in the immediate area I might be missing some important stuff outside of the neighborhood.
Ultimately here’s the money statement. It’s not how far we can go for comps, but where we should go.
Good luck.
So if you go farther back in time, is there an adjustment for value because that older comparable doesn’t include the increase in value over the last 7-10 months? Due to the huge increases in values in 2021, for example, a similar comparable sale used from February 2021 would be potentially outdated for value when comparing it to a sale in November of 2021.
Absolutely. We would have to adjust for any difference – and part of that includes the market changing. The market has often risen substantially, so if a sale is too old that adjustment could be hefty.
In my case, they minused or added items based on value..eg.. if in area an additional bedroom is $25k in value and full bath is $35k , you can adjust homes accordingly.. based on the #’s .. causes a bit of math, but you can get a comparable value.
They have a value of homes on ages etc . You deduct or add accordingly
Hope that helps a bit?
Good luck !
Thanks. If there are differences and the market is willing to pay for those differences, then adjustments should definitely be made. I think the key is these adjustments being well-supported and the comps really reflecting value despite the difference in location.
Great article, heres my question, can all the comps or 4/5th of them be in a different county?? For FHA loans? Or can they go anywhere in a radius??
Hi Frank. There is no radius rule for FHA or any sort of county rule. The key is for an appraiser to use the best available comparisons. FHA does want appraisers to use comps within 12 months, so I suppose sometimes appraisers might have to use some sales that are further out if there haven’t been many recent ones (but this is why I don’t like FHA because I don’t want to choose comps based on a rule like this). In short, I think there are some situations where multiple counties are going to be competitive while in other cases an appraiser has no business choosing comps from a different county.
We had our home appraised and were shocked by the low value of our home.
As we looked more closely, our appraiser used comps 6-12 months old. I do believe that she used the same ones that were used for our last refinance.
Anyway, there were many current comps that could have been used in our favor as prices in our area have gone up significantly.
The comps used were irrelevant and old and low vs today’s market.
What can I do about this?
Hi Katie. It’s always hard to speak into a situation like this because I do not know who is high or low. It’s definitely okay for an appraiser to use older comps and account for the way the market has changed if the market has gone up (or down) since the time these properties got into contract. Are the more recent sales actually similar or are they just sales? That’s always the question. What can you do? I would suggest talking with your loan officer if this is a refinance or talking with the listing agent about options if you are selling your house. I think this is where you need to lean on their expertise and hopefully there is a remedy. Please keep me posted with any follow-up questions.
Hi, Not sure if you are still replying to comments on this article as it was written quite some time ago! I don’t think anything has been said about using price per square foot to determine appraisal value. How similar in square footage do comps need to be? Can the price per sq ft be used to determine the market value of a home that is a bit different in sq footage?
Thank you so much!
Val
Actually, also wondering about the number of comps that are required for an appraisal….
Lender reports require at least three closed sales, and in many cases lenders want appraisers to also include one or two current listings / pendings.
Hi there. I’m still responding. Thanks for the comment. Price per sq ft figures tend to be all over the place depending on so many factors (size of house, lot size, upgrades, condition, etc…). Here’s a post I wrote about price per sq ft, and I think it helps show that price per sq ft can range drastically, which means it can be a really faulty method for valuing a property. Granted, I think it’s absolutely worth paying attention to, but price per sq ft tends to vary significantly depending on the size of the house. https://sacramentoappraisalblog.com/2022/03/15/starbucks-cups-price-per-sq-ft-in-real-estate/
Thanks so much! I appreciate your quick responses, as well as the thorough and understandable explanations! I did read through the article on price per sq. ft – very good! One more question about square footage….what is considered to be a similar size? Is it within a certain percentage of the square footage? I imagine the number of bedrooms is a factor as well – are houses with 3 and 4 bedrooms considered similar, or does it have to be same # of bedrooms?
Thanks!
There isn’t a rule because the market isn’t going to behave the same way across the country throughout every price range. There comes a point when something is too dissimilar though that we should maybe avoid comparison. A 1,000 sq ft house and a 3,500 sq ft house, for instance, are too far apart in my opinion. This is an apple and an orange as far as I’m concerned. Would a buyer consider purchasing both properties at the same time? Or would a buyer consider the other property to be a substitute if the subject wasn’t available? Those are viable questions. In the case of a 3,500 sq ft house, that buyer is probably not going to buy the 1,000 sq ft house. There is likely a vast difference in price these properties too, which also means there are different buyer profiles here. So that’s a clue for us.
And yes, bedroom count can matter. If we are typically focusing on homes of about the same size, they likely have a similar bedroom count. Here is something I wrote about bedroom count last year. Just in case you wanted some further reading… https://sacramentoappraisalblog.com/2021/08/25/how-bedroom-value-adjustments-do-not-work/ But to answer your question, it doesn’t have to be the same bedroom count, but it’s a good idea to be similar enough to where a buyer would likely also purchase that home or consider it a substitute. It’s just if we are comparing a 2-bedroom home with a 5-bedroom home, on some level we start to question whether we are making a good comparison or not. And chances are there is a size difference here anyway, so maybe that is the first clue.
Hi, here it is September 2022 and I stumbled upon your blog. Hopefully you are still active!
I have a question… We bought a property in April of this year and put $26,000 into it immediately (how do you contractor to completely paint the interior, add beams to the living room, restain all of the beams outside, cabinet builder come over and adjust our cabinets to put in a built-in refrigerator, which was $10,000, Wolf gas cooktop, and all of the rest of the appliances have been updated and are top of the line ), plus more updates, and now we are needing to move due to being relocated.
Right before listing ours a home in our neighborhood that is custom as well went pending 2 days after listing it. It has a pool (we do not) and on a better lot with no read neoghbors, and it is 350 ft.² larger than ours, but it is the same age as ours and also has an oversized 2 car garage like ours as well.
Ours is 2997 ft.² all on one level. Our home and that one is mixed in with track homes but you can’t tell because there aren’t any alike that we can find. They are all brick and stone. My question is a realtor wanted to list ours for $602,000 ? and would not go higher until I refused to list it unless he listed it for at least $615k but we settled on $610,000.
We got a full price offer – actually $1000 above asking price within 24 hours!
But when we looked at the net sheet that we had not seen before we realized we would be under $26,000 after paying closing costs due to the improvements.. We decided to verbally counter offer to the buyers for $625,000 and they declined it and instead of upping the price and trying to sell it for $625,000 our realtor decided to take it OFF of the market! It had only been on the market for 4 days. He did not show us a net sheet when we signed up with him and if we knew how upside down we would be we would’ve found someone else to kist it for $625K.
My question is once that house a block and a half in our same neighborhood closes for $879,900 (we are assuming they accepted a full price offer because it went pending within 48 hours and they would not go lower than that so quickly ) won’t it raise our comps? Most of the homes that have sold recently have not been updated like ours has been now and are not built by a custom builder like ours.
There is also a house on the market down our street that’s a little larger than ours 300 sq ft) for $759,000 but it’s been on the market for a few months. I spoke to that listing agent and she said that they got a pretty good offer but they won’t budge on price. It has not been updated at all like ours and it backs up to a busy street.
I’m thinking about putting it for sale by owner and offering commission to the selling agent. I’m aware that it won’t go on our local county MLS. What’s that house that’s custom like ours does sell for $879,000 then we would be able to put a higher price on our house and have a realtor list it and sell it. Where is the scenario we could always lease it out. Just didn’t want all of our appliances to get dented and/or damaged.
Hi there. I appreciate you reaching out. I’ll say it’s difficult to speak definitively here about your house and value for a situation I haven’t studied. I will say one sale doesn’t make or break a market. That’s the truth. This means one higher sale doesn’t pull everything up just as one lower sale doesn’t pull everything down. I think hearing the vast difference in price between the sale at $879,900 and yours, I have to wonder if it’s really similar. In other words, is it truly a comparable, or just a sale? There’s a real difference there. As an appraiser I would ask what other similar homes have sold for recently, and what similar homes are selling for right now. Sometimes listing that aren’t selling are clues into the market also (that the property isn’t worth the amount of the list price). This is where I would have a trend graph with years of data too to help visualize what the market has done over a longer period of time. This would be helpful visual context to show what sort of price tier might be reasonable or not. No matter what, it sounds like even you’re thinking value is much lower if you’re wanting to list at $625K. I would just say to be in tune with what the market is doing in your area. If prices are going down, that may influence your strategy.
Thank you for your help. There are two other realtors that are reaching out to me now that my realtor decided to take it off the market because they refused to sell it for the asking price. I guess it hurt his pride? So we have signed a cancellation agreement. The only real difference between the $879,000 house and ours is that they are on a man-made pond with a larger lot and a large pool. It’s exactly 7 houses down the road. Our kitchen is similar with the same cabinets and our appliances are new unlike theirs. We are from Florida originally and almost everyone has a pool but here in Texas it’s not as common so I think that when someone has a pool their home value goes way up unlike Florida. I think we were only given $20,000 in the amount of our appraisal for a pool even though a Disney contractor build our last one and it cost a lot. It also has 8 foot knotty alder doors throughout but their doors are arched at the top a little bit. There’s is more of a Tuscan flair and ours is more of a ranch style. Both of our homes have hand scraped wood, I’m sure it’s mainly just a lot with the pond behind it and the pool and it has a resort style feel to it and that’s putting it above and beyond and it might be someone with a lot of cash that doesn’t care how it appraises.
I’ve looked at all the other houses that are listed and/or have sold in our direct neighborhood and none of them are like ours or like the one 7 houses down. That doesn’t mean there aren’t any -it just means that they haven’t been listed or sold, as you know.
I guess the only thing I can do is either list it by owner and offer a selling agent commission or allow one of the two realtors that’s been calling me to list it for what we need to not be under water and if the appraisal comes up short the seller will have to pay the difference. Ugh
Thanks Lisa. I hope things go well for you. Best wishes.