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.
Thanks for being here.
Questions: What tips do you have for comp selection in today’s market?