Comp selection is at the HEART of the appraisal process. First off what exactly IS a comparable sale? In a nutshell, it is that sale which would be the best replacement for the SUBJECT property if that property was no longer available for purchase. Would a buyer reasonably consider purchasing this other property in place of the Subject? Yes or No!
What are the steps in comp selection:
Consider the Bullseye. We start by first looking inside the same development or immediate neighborhood of the Subject. Location is key because it means it is the most similar to the Subject and inside the same school district, which drives buyers decisions many times. (That is not to say we won't select a comp in another school district, but we must be prepared to make adjustments for any locational variance if we do).
Next we want similar style: If the Subject is a ranch, we want to select other ranch homes. Buyers purchasing ranches like either the style of them or the fact that they have no stairs. So even if we are inside the same development, we may not choose a 2 story home to compare to that ranch, because that does not represent the actions of a typical buyer. Unless most buyers want to be inside THAT popular development regardless of style. Appraisers then need to recognize location influence over style. Knowledge of the area by an Appraiser is crutial in this particular case.
Next we look at year built, quality and condition of the home. If the Subject has been nicely renovated, then we do not want to select a home that has no renovations or updates, even if it is located inside the same development. We would be better served to expand the distance around that Bullseye to find a comparable renovated home. If you were a buyer and wanted a nicely renovated home you are not going to buy one that needs alot of updates.
Next we look at date of sale. Ideally we want a sale that occurred as recently as possible. Recent sales provide the best indicator for market trends. Preferably a sale that is no older than 1 year from the date we conduct the appraisal. However if we find a sale inside the same development or one nearby which is most similar to the Subject and it is over 1 year old, we can use that sale as an additional supportive comp to the primary 3 comparable sales that the Appraiser typically uses in most reports.
Going beyond the Bullseye: An Appraiser can and will go outside the Subject development if no good comps exist inside the Subject development. They just need to make sure that the location they select is comparable to the Subject's location. Don't expect an Appraiser to go inside a superior development with higher priced homes and superior amenities for their comparables. Remember, would a buyer do this? The answer is likely NO unless they are willing to pay much more and then we are not comparing apples to apples any longer.
Fannie MAE never put restraints on Appraisers to stay within 1 mile or within 1 year for comps. Lenders placed these stipulations for comp selection. If the Appraiser can provide good reason to go beyond the Bullseye in distance or time to find truly comparable sales, then they can do so.
In Summary: Always be thinking about what the BUYERS are going to do. If they are looking to purchase the Subject and it was no longer available (and assuming they are not going to pay more) then what other properties in the area will produce the best replacement for that property?
If you read this to the end, Congratulations! Now what was the one thing I left out here?
That will be the subject of another newsletter. Appraiser's must determine the appropriate adjustments for any variances between the comparable sales and the Subject. Most sales are not exactly the same as the Subject. The sole purpose for the adjustments is to make the comparable sales EQUAL to the Subject. There are various ways that this can be done, but it takes alot of experience and knowledge of the market.
Thanks for stopping by and be looking out for my next newsletter...The ANATOMY of Adjustments!