choosing comps

“You need at least one more sale for value to be legit.” That’s what someone told me recently since there was literally one sale that closed about 50K higher than anything else. Value couldn’t be that high, right? Or could it?

How can you tell where a neighborhood market is at when there is only one sale or even zero recent sales? It can be tricky to interpret value when there is so little recent data, so let me share a helpful example of a PUD subdivision in Orangevale on Madison Green Lane. Here are some steps I took to see the market.

Step 1: Look at all recent sales in the immediate neighborhood

Does one sale at $170,000 make the market? Since there was literally only one recent sale this high over the past 5 years, the question became, is this one financed sale a lone ranger or does it represent the market? On paper it looks like value should seemingly be far less than $170K, right? But let’s go to Step 2 to help bring in some value context.

Step 2: Consider older sales and market trends

Taking a look at older neighborhood sales can give clues to interpret today’s market. Based on the graph above, despite only one recent sale, it looks like current values should theoretically be hitting at the $170K-ish level, right? Of course zip code trends may not be the same as neighborhood trends, but in this case value around $170K is starting to smell more reasonable from a trend basis at least. This is an example why graphing is important for real estate professionals.

MLS Tip for Locals: If you know current zip code values are similar to Q1 2008 or Q3 2003, for example, use the archive search in Sacramento MLS to see what properties in your immediate neighborhood were selling for during those time periods. This will help give you some context to keep on the back burner as you move on to Step 3. If you have no idea about historic values, use Trendgraphix to look at today’s median price and average price per sq ft in your zip code or area. Then change the date range back further until you find when the market was at a similar price level (right now you’ll probably be going back around early 2008 and late 2003 / early 2004 in many areas of Sacramento). When you find those dates, it’s time to do an archive search of sales. Log into MLS, go to “Searches”, “Archive”, and then scroll all the way down to the bottom of the page so you can do a polygon search on the map. This may help give you some historic context for the neighborhood. Be careful of course because zip code trends may not be the same as your niche market. Today’s data trumps old data too.

Step 3: Research nearby competitive neighborhoods

The best thing we can do to unpack value is to look at current sales and listings in a neighborhood, but when data is sparse we need to look to nearby competitive subdivisions. We shouldn’t be trying to cherry pick higher sales of course, but rather unpack the market. In this case I found comps from some nearby subdivisions, but I also used some data in these complexes to help show how the market has moved. For instance, when comparing sales on Madison Green Lane with a PUD off Main Street, a superior PUD in nearby Fair Oaks, and even the Rollingwood Condos across the street (I wouldn’t use these condos as comps, but only for context), a clear picture of the market began to emerge. All of these subdivisions have many more recent sales, and comparing the trends over time essentially helps paint a context that the rest of the market has moved upward and actually supports this higher value in the subject complex.

Three Key Takeaways:

1. No “Two Sales” Rule: There is no “two sales” rule where appraisers needs to have at least two sales in the subdivision at a higher price level for a property to appraise at that level. Of course the appraiser does need at least three comparable closed sales, but these sales don’t necessarily have to come from the immediate neighborhood. If there has been a lack of sales, it’s okay to use competitive sales in the surrounding market. In the case above, value was already there in the neighborhood around $170K even though multiple sales did not yet tell that story. It was simply a matter of showing and supporting value through historic trends, one recent high sale and listing, and most importantly comparable sales in the surrounding area.
2. More to the Story: In real estate we always need to get the full story. In this case many previous sales in recent years had been REOs and short sales, and these older prices simply do not have any bearing on today’s market. On paper it looks like the market was much lower, but in reality there was a huge upward trend in the surrounding market that simply wasn’t yet reflected in the sales data in this neighborhood.
3. One Sale Doesn’t Make a Market: It’s important to realize that one high sale does not make a market. There are many reasons why a property might close way too high and essentially become an outlier that should be discarded. Yet in this case the lonesome sale was actually a sign where the market was really at. But if this one sale at $170K was all alone and no other nearby competitive subdivisions were selling at that level, then it would be a rogue sale rather than a legit representation of the market. Ultimately there needs to be market support instead of just one sale.

Question: Any stories, insight or questions? Please comment below.

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