Here is a window into my methodology for what I do when a property is unique or there are no recent sales in the neighborhood:
A) Immediate Neighborhood: I start by looking at older sales within the immediate neighborhood over the past several years to help gauge how the market has historically perceived the neighborhood. Most lenders want appraisers to use sales within the past 90 days, but that’s not always possible. There is nothing wrong with using older sales in an appraisal report if need be (along with some newer ones too), but it’s also important to make adjustments based on how the market has changed over time. If there has been an increase or decrease in value, for instance, then I would make an adjustment in my report for the uptick or decline. Let me clarify that I tend to not use sales over a year old in most cases in my appraisal reports, but I definitely research sales much older for reference. By the way, FHA does not allow comps to be older than one year.
B) Competitive Neighborhoods: Next I look at competitive neighborhoods to find some recent sales to help illustrate the current market. The key of course is knowing which neighborhoods are competitive. Making improper comparisons can really boost or bust value. This is why caution should be exercised when choosing “comps” from outside the neighborhood. After all it’s a red flag if all sales in the immediate neighborhood are ignored by the appraiser – unless of course there is a good reason why they are not relevant. Frankly, appraisers should use the best available comparable sales – whether they are next door or much further away. If there is a value difference between two neighborhoods, an appraiser can make an adjustment for that difference too. By the way, lenders tend to want appraisers to stay within a “one-mile radius“, but appraisers are definitely not bound to that rule despite many in the real estate industry thinking that is the case.
C) Current Listings: Thirdly, I look more deeply at current listings in the immediate neighborhood. Sometimes these can help me glean insight into how the market is seeing the neighborhood. This is really where talking with knowledgeable Realtors is paramount. Sometimes withdrawn listings can also provide insight into the market – particularly if they were pulled from MLS and then sold privately. Listings are definitely supplementary market data and inferior to sales, but they are still good for research. It’s important to remember too that just because a house is priced at a certain level does not mean it will sell at that price.
D) Other Resources: I talk with appraiser colleagues through the REAA (a professional organization I belong to), create historical graphs and consider other metrics such as price per square foot, rental value and the Cost Approach if relevant. In some cases, there really aren’t any perfect comparable sales to choose from, so the appraiser simply has to work with what is available. This might make for an ugly-looking appraisal, but it is what it is. Again, it would be nice to have several model match sales, but that’s just not how it happens in many cases.
Questions: Any stories or insight to add? Realtors, how do you come up with prices for your listings when data is sparce? I’d love to hear from you in the comments below.