Homeowners, real estate agents, and other appraisers often ask me for advice on how to select comparable sales. Selecting comparable sales is one of the most important things that an appraiser does and it can also be the most difficult. The Appraisal Practices Board Valuation Advisory #4 covers this topic, but the document is written for appraisers. Here are some thoughts that I have on comparable selection.
Most of the time, when selecting comparables, we are probably not going to have several homes that recently sold (under normal market conditions) that are exactly the same as the subject property. If we did, then comparable section would be easy. Without exact matches to our subject property, we need to select sales that bracket all of the home’s significant aspects including location, physical, legal, and economic conditions (including property interests, feasible uses, cash equivalency, etc...).
As used here, the term “bracket” means selecting comparables that are judged as superior to the subject property, and others that are viewed as inferior. Bracketing may be based on several criteria including square footage, age, location, and condition. Additionally, comparables should bracket overall value by having at least one property that is superior in most ways and another property that is inferior in most ways to most buyers. Bracketing allows appraisers to place the subject property in the middle of a range and to support dollar adjustments convincingly that are estimated for the differences. Also, if the subject is less unique and sits within a range of sales, it might be easy to rank those sales from low to high and know about where the subject’s most reasonable value should fall without having to make any adjustments.
Each time adjustments are made to a comparable sale, that sale becomes a less accurate indicator of value. Therefore, appraisers should not only try to select comparable sales that require the fewest adjustments, but also seek to choose comparable sales that require less subjective and more easily supported adjustments. Often, I will choose a comparable that might have an older sales date over a more recent sale from a different location, because adjustments for market change or time can often be more easily supported with quantifiable statistical data than a location adjustment. Making judgment calls like this is where comparable selection becomes difficult and requires a great deal of market and neighborhood experience to do correctly.
It is important to recognize that the strongest indicator of value for a very unique property might have very high adjustments compared to the strongest indicator for a more common home. There is no limit on the size or quantity of adjustments that appraisers can apply to a comparable property, only that they should attempt to find the most comparable properties, they should be able to explain why one comparable was selected over another, and they should be able to explain why adjustments are (or are not) warranted.
There is no rule that appraisers cannot use distressed sales like bank owned properties (REO) and Short Sales (a property that sold for less than the loan amount under an agreement with the bank to avoid foreclosure) as comparable properties. These properties should be avoided when there are more comparable sales available. However, REOs and Short Sales typically sell for less than transactions without distress and should not be omitted by appraisers, as some articles in the press have suggested. If a REO just like the subject property sold for $190,000, then that might be strong evidence that the subject is worth as much or more than $190,000.
Properties that have been listed for sale but have not sold can also be strong indicators of value. These comparable listings should not be relied on too heavily to estimate a market value, but listings can be particularly convincing at indicating what the subject property would compete with if placed on the market and what a subject property is not worth. For example, if an almost identical property has been listed for a normal market time at $200,000 and did not sell, it might be strong evidence that the subject is worth something less than $200,000.
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