Appraisers have to be really methodical about how they pick comparable properties, or comps, when they are doing home appraisals. There are extensive guidelines from Fannie Mae, Freddie Mac, and the FHA about what constitutes an appropriate comp for a home appraisal. Here’s a peek into how appraisers pick comps and how they affect a home’s current market value.
What Exactly are Comps?
To correctly determine the price of a subject property, appraisers compare recent sales from within a market. Ideally, appraisers find comps within a one-mile radius (in any urban or suburban neighborhood, not rural ones). Imagine dropping a petal in a pond and the ripples it creates. The petal is the house, and the ripples are the expanding radii around it. An appraiser wants to find comps as close to the home as possible. Typically, comps are homes that have sold within the last six months but that timeline can go up to twelve in extreme circumstances.
Lenders typically require that any adjustments that exceed 10% single line, 15% net, or 25% gross must be explained and reconciled in the report to show the need for such dissimilar comparables.
Appraisers pick at least three closed sales as comps. They can also list several active or pending listings to illustrate current market behavior, which can have a big effect on a home’s value.
How Do Appraisers Choose Comps?
Appraisers try very hard to match the subject property with properties as similar as possible. In other words, they want to find places the buyer might have considered instead of the subject property if it hadn’t been available.
Location: First, the appraiser looks at location, which is always the most important thing in real estate. “Location, location, location” as the old, entirely accurate cliche goes. So, in most situations, you want to find the closest possible comps.
Age: Then, the appraiser tries to find recent sales of homes similar in age. Construction materials, home designs, and appliances change often, so homes of different eras can be worth vastly different amounts. You wouldn’t, for instance, compare a home built in the 1960s to a home built in 2005.
Style and Lot Size: The style of the home is also very important. You’d want to compare a one-story to a one-story and a tri-level home to a tri-level home. A classic Tudor-style house should be compared to another Tudor rather than a home with an ultra-modern design. Lot sizes should also be as similar as possible in both acreage and layout.
Updates and Features: Appraisers also need be wary about comps that have been recently updated or when assessing homes with very unusual features. Does the subject property have a water feature? Some sort of large, baroque staircase? Multiple fireplaces? Factors like these could throw off the value of the subject property.
Bedrooms/Bathrooms: The number of bedrooms and bathrooms above ground must be as close to the same as possible (bedrooms and bathrooms below ground are not worth the same). After all, the number of bedrooms and bathrooms in a home is one of the main things people search for when searching for a home.
Zoning and Neighborhood Features: Comps should have the same zoning and similar features. Similar to the point about locations, the things around the property matter a great deal in terms of its value. A home that’s next to a loud freeway would be valued very differently than a home near a large nature preserve, for plenty of obvious reasons.
One final, important caveat to all of this: different properties may have unique features that require much more specific criteria. If you have a riding arena on a property, for example, nothing else matters. Valuable features that attract certain, specific types of buyers render the broader things an appraiser normally cares about when assessing comps much less relevant.
How do Appraisers Use Comps to Determine Value?
After appraisers select comps, they compare them all to each other. They make adjustments based on differences in upgrades, size, features, sales date, and more. They then calculate the adjusted value for the subject property that reflects the home’s true value.
If you have any questions about how appraisers use comps to determine value, we’d love to have you call our office at (425) 967-3794 or go here for clarification.