I’ve been getting asked lots of questions lately about choosing comps since the market shifted. Here are some things people have been asking me.
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QUESTIONS I’VE BEEN ASKED LATELY
Are you using comps only within 60 days right now?
No. While my preference is to use recent sales, I’m okay with using older sales if the older ones really are more comparable. In short, if I use older sales and the market has gone down in value since those properties got into contract, then I’m going to need to adjust those sales down. The truth is even a sale that is 60 days old can feel ancient today because it probably got into contract a month before it closed, which means the sale really reflects the market from 90 days ago. Thus, I’m likely going to have to adjust even 60-day sales down since prices have been dipping lately.
What role do listings and pendings play in the value?
I’m giving strong weight to pendings and listings because that’s where we see the current market. Closed sales tell us where prices were at when these properties got into contract, so sales in a sense are like historic artifacts that tell us about the past. What is getting into contract right now? That’s where we are going to see what buyers are willing to pay today. I realize we don’t always know the price of each pending, but this is where we want to talk to listing agents and look for a group of pendings, listings, and recent sales to put together the puzzle of where value is right now. In other words, we need to be careful not to base our entire perception of value on one pending contract (which could be too low or too high anyway). Ultimately, if someone handed me a stack of comps from May and all the pendings and listings are lower right now, that’s a clue that I need to adjust older sales down because prices have softened. Or if listings are at the same level, but sitting and feeling stale, that’s also a clue the market has changed.
Are you adjusting down 7% since the median price is down?
The median price is down 7% (or $45,000) in the Sacramento region since May, but that doesn’t mean every single property is down by that much. Remember, at this time of year, part of the median price going down has to do with smaller homes starting to sell, so not all of the median price decline is a value decline. It would be a mistake to take a figure of 7% (or $45,000) and automatically adjust properties down by that much. Look, regional price metrics aren’t going to rigidly apply to every property and neighborhood. It’s possible the adjustment in some areas could be substantially more or way less. This is where we want to look to the comps for the answers. What is happening in this particular neighborhood? That’s always the question, so we have to be careful about imposing regional or ZIP code metrics on a neighborhood. What sort of price difference is there between older sales, newer sales, and current pendings / listings? It’s like a puzzle where we’re trying to gauge the difference from the past (sales) and the present (pendings / listings). It helps to make graphs and such too, but that’s a different blog post.
NOTE: Some older sales might not need any adjustment because prices today could be at a similar level to back then.
Do appraisers have to stay within a one-mile radius?
No. It’s not about how far you can go for comps, but where you should go. One of the temptations today (and in any market) is to hand appraisers “comps” from further away that don’t make any sense for the location of the subject property. In some situations, it’s normal to choose comps from multiple miles away because the market area is spread out (think areas with acreage), but in other cases an appraiser is going to have a tight focus on the immediate neighborhood because prices could be lower or higher when going out further. Ultimately, there is no such thing as a one-mile radius rule, but if an appraiser is passing by lots of lower or higher-priced sales and choosing something different further away, that brings up serious questions. The truth is choosing the wrong comps, and not adjusting for location, can undervalue or overvalue a property. This is why we need to be aware of how prices change in different areas. Maybe it’s the school district, size of homes, quality of construction, architecture, access to commercial districts, etc… By the way, here is a post to talk about bias and boundaries.
Do you start with a 1/4 mile and then go out further?
There isn’t just one way to do this. I personally don’t ever use a radius because I’ve never seen a neighborhood in the shape of a circle. However, I know an appraiser who does a radius, and that’s fine if it works for her. Personally, I like to start with tight boundaries in the immediate neighborhood by drawing with the MLS polygon tool, and then I continue to go out further as needed until I get to the larger neighborhood boundaries. I like to stay within the larger neighborhood where possible, but I’m also going to look at what’s happening in surrounding areas too to be sure I’m not missing something about the market. Ultimately, I tend to start small and go out further as needed, but there isn’t just one way to do this. I know an appraiser who starts big and whittles down to a smaller area. No matter how we go about this, the key is that the value we come up with is credible for the location.
Closing thoughts: This post could be a dissertation, but it’s only a brief window into choosing comps. I’m actually teaching a three-hour class soon on comps and adjustments in case you’re interested (held in Sacramento and not on Zoom). My advice? Study current listings and pendings, and don’t be afraid to make hefty reductions if needed. But here’s the thing. Be careful about making the same canned adjustments in every single neighborhood because the trend isn’t going to be the same in every price range and location. And lastly, just like Neo followed the white rabbit, follow the stats. If there isn’t an adjustment down to give, then don’t give one. Or if there’s a shocking adjustment to give, but it’s legit, it’s time to give it.
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Thanks for being here.
Questions: What tips do you have for comp selection in today’s market?
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Joe Lynch says
Hi Ryan, timely post. I’ve been saying similar things to the agents west of the river here in Yolo County. George Dell teaches that we should start with a larger data set than we expect to need and then whittle down to reduce the chance of missing comps. That said, for markets I know well, I start with what I expect to work and then expand if there are not enough comps for me to understand the subject.
One other thing I’ve been telling agents is the decline in sales we’re seeing in most markets will make comping out non-conforming homes or homes in small markets that much harder to figure out.
Ryan Lundquist says
Thanks Joe. That’s interesting to hear about George Dell. I don’t mind either way. I think the job can get done as long as we follow the process of looking small to big or big to small. When searching for comps, I find it’s a mistake to only look at 90 days too. Sometimes having such a narrow focus will really get in the way of seeing the market. This is why I’m going to look at lots of sales in the immediate area and wider area. I might start with all sales in 2022 and then look at everything in 2021, etc… Having more context and a sense of history only helps us. We might not use older sales as comps, but we can use them for research. And when we make graphs, it can help us see things visually too.
Great point about non-conforming. On a related note, I haven’t encountered any real issue yet with not having enough comps, but I’m very aware that volume has been down 26% since May in the region (and most counties), so we are certainly missing sales. This could be an issue (especially with oddball properties).
Joe Lynch says
Hey Ryan,
For at least a decade I’ve started all searches with 12 months back. Only in a place like North Natomas will I cut down to 6 months back for comp searches.
The report I’m working on now is a top of market property and I started my search two years back because I suspected strongly that I would have a lack of competing sales in the last 90 days…..
Ryan Lundquist says
Interesting to hear. I typically like about 6 months or so and then I go to 12. And then more. But as the year progresses, I think I just keep adding months, so right now I like to look at everything from January 1 as my beginning, so my comp time will keep getting longer until the new year because I’ll keep that date intact. Just how I do it.
Gary Kristensen says
I too start close and move out. It is very difficult to sift through large amounts of data so starting close gets us familiar with the immediate market area, how the subject fits in, and what we need to focus on as we move our search out. Further, starting close helps to make sure we don’t miss the very similar property that is very close. Those are the sales that can get us in trouble if we miss them.
Ryan Lundquist says
That’s what I do too, Gary. Thanks. I want to really spend some time understanding the immediate area and then move out. I find it’s incredibly tedious if I try to look at literally every single sale in an entire area. And this is why there is no such thing as a five-minute comp check. No matter how we do this, it takes time to see the market and understand value.
Judy Anderson says
I just had an appraisal come in low on a 1600 sq ft 4 bedroom home in Roseville. I was told they could not give value to the newer owned solar because there were no recent sales with owned solar in the neighborhood. They also removed the sq footage of a $35K permitted sunroom for the same reason. Home was originally 1600. I had comps for both less then 1 mile away- homes were same year & size but was told when you have enough comps directly near the home you cannot use any a few blocks away. First time this has happened.
Ryan Lundquist says
Hmm, thanks for sharing. That’s not true about value if there are no recent comps. The appraiser can look for data in other ways such as other neighborhoods, older sales, etc… Solar is not easy, but I wonder if an aerial view of the neighborhood would shed any light on the subject. In other words, are there more homes with solar? Could some of those actually have sold in recent years? There is no rule in our uniform standards that states recent sales must be used when figuring out contributory value. That is likely ideal of course, but the appraiser can still consider value in other ways. This is where it’s likely important to look to older sales, talk to agents, talk to other appraisers, maybe look at some different nearby neighborhoods, etc… The easy part is to say there is no value… Here is a YouTube video I put together talking about solar in case it’s useful. https://www.youtube.com/watch?v=WSbdVb_XUw8
A Sun Room likely does not count in the square footage, but it can count in the value. I see Sun Rooms all the time in Sun City Roseville that are simply that – Sun Rooms (not square footage). The installers often say stuff like, “You can count this in the square footage,” but that’s not accurate. These areas rarely have a heat source, which is the bare minimum requirement for square footage. And of course the quality is not on par with the rest of the house either the vast bulk of the time. I don’t know your situation here. I just wanted to throw out two cents for context. I don’t know if this applies or not, but here is a post I wrote about an enclosed patio / Sun Room…. https://sacramentoappraisalblog.com/2014/09/30/does-an-enclosed-patio-count-in-the-square-footage/
Barry Wilson says
In a suburban or urban area, I start with a 1 mile radius and 240 days. If there are less than 30 comps I expand the area, if more than than 30 I start inputting size, style and age parameters. Our MLS requires age built, but with many older homes with major remodeling I do not want to narrow the age range too soon. An updated/remodeled 1950’s home could be a reasonable comp for a similar style subject built in 2009.
The Seattle market still has increasing prices in some areas, declining in others and most of the declining areas were rising until the first quarter of this year.
It’s a great life if we don’t weaken. Be careful out there!
Ryan Lundquist says
Thanks Barry. It’s interesting hearing how you do things. I like putting some parameters on there also if there are too many data points. It’s cumbersome looking through 100 sales, for instance, so some sort of parameter is helpful to whittle it down. Any reason for 240 days?
Barry Wilson says
My goal is to provide the client with 3-4 closed sales from the past 90-days and 1-2 active or pendings. With the constantly changing markets of the past few years, I find that 9-12 month old sales often need more detailed analysis and adjustments before I can use them. Most of the 7-8 month old sales will be eliminated fairly soon, but a quick look at the photo and the agent’s comments might be helpful. And the time frame is an easy search parameter adjustment when there are many comps.
Ryan Lundquist says
Thanks Barry.
Tom Horn says
Great post, Ryan. I was giving a presentation to some agents recently and I also mentioned the supposed one-mile rule. This is typically a lender-level requirement because Fannie Mae says it is okay to go as far as you would like as long as all factors are adjusted for. I always recommend staying within the same subdivision or neighborhood if at all possible when choosing comps and if you don’t have enough sales then start expanding outward to other competitive market areas where the buyer would consider looking. School systems are important factors in the Birmingham market so I recommend staying with the same system. I think it is important for agents to know the process that appraisers go through and the criteria we use so that they can mimic what we do. This will increase the probability that the sales used in their pricing will most likely be those considered by the appraiser when he or she does their job.
Ryan Lundquist says
Thanks Tom. Love it. Yes, schools can really matter. Often it’s not something we have to consider too much if we’re staying in the same subdivision, but once we start going out further, it can make a difference at times. Hope you and the family are well.