Want to know how appraisers look for comparable sales?
This post is all about the details of running comps for real estate appraisal.
Figuring out what a house is worth is fun for us!
Would you like to know what appraisers are looking for when deciding on which comparable sales to use?
I’m removing the mystery of how we search for comparable sales for a home appraisal.
Once you learn the secret, you will be able to know what to look for also!
This post is all about how to find comparable sales in real estate appraisal.
Sales Comparison Approach
Before we talk about how to find comparable sales it’s important to understand the Sales Comparison Approach.
Relying on comparable sales to determine an estimate of market value is one of three approaches to value.
All three approaches must be considered.
But, the sales comparison approach is the most widely used method when appraising residential real estate in our market.
Finding comparable sales relies on the principle of substitution, which is then further influenced by supply and demand.
First, we focus on the Buyer’s priorities.
Who is my Buyer?
Appraisers do not consider age, gender, race, religion, ethnicity, color, national origin, sexual identity/orientation, familial status, disability. The Fair Housing Act combined with the ethics we must follow according to USPAP (Uniform Standards of Professional Appraisal Practice) are very clear about this.
(Plus, in my opinion, it’s just plain wrong.)
Our focus isn’t the person, it’s what the person is looking for…..
We focus on the physical and legal attributes of what a typical buyer considers to be important about this particular property.
The reason we focus on the Buyer’s priorities first is because we want to understand why they would want to buy this property.
It’s impossible to find a comparable sale unless you know why it’s comparable.
Quite often I will ask the homeowner why they purchased this property.
And, I will ask the Buyer’s realtor about the other houses their client was considering to purchase.
The reasons can vary greatly depending on the house we are appraising and we will chat about these reasons in a second.
Once we know their reasons then, we can put the principle of substitution to work in finding comparable sales.
We ask ourselves: “If this house were not available for sale, which house would the typical Buyer consider to be a reasonable substitute?”
Finding Comparable Sales – Running Comps
Here’s where the supply and demand comes into play.
Depending on the economic conditions, mortgage rates, world events, etc, …. finding comparable sales could be super easy…. or extremely challenging.
Especially tricky are the unique properties – which we love appraising!
Comparable sales should have the same appeal as the property we are appraising.
** IMPORTANT: we are not appraising the Sale Price. We are appraising the property.
Therefore, I do not search for comparable sales based upon a sale price.
Sales vs Comparable Sales
Quite often a homeowner or a realtor will have a certain dollar figure in mind when listing a house for sale that is not based upon comparable sales.
The list price is sometimes based upon what the homeowner needs in order to pay off certain loans or to purchase their next property.
But this is not a reasonable method for determining value.
Some homeowners will add up the cost of the improvements they put into the house to determine a value. But, fail to realize that cost does not equal value.
Certain improvements can make a property more marketable but not necessarily more valuable.
Or, the price offered by the Buyer is often based upon an “auction” type of market where there are multiple offers and the buyers are feeling pressured because they need to buy a home.
This is an example of duress and therefore, not a reliable method for determining value.
Then, in order to justify the sale price, the homeowners or realtors will search for sales that support the sale price.
This makes sense except for one thing: if the search is focused on a sale price instead of the actual attributes of the property or the terms of the sale the result is skewed.
The result is a list of sales.
But, not necessarily a list of comparable sales.
Comparable Sales are Reasonable Substitutes
Once we understand the reason a buyer would purchase the property we are appraising then, we can begin our search.
Below is a list of attributes that we have used when searching for comparable sales in our market area.
These are the reasons that a typical buyer would purchase the house or avoid the house altogether:
- within a specific county, city, township, boro
- school district
- zoning
- flood zones
- river access, waterfront
- historic designation or significance
- proximity to schools, employment, airport, train station
- conservation easement, deed restrictions
- natural disaster area
- Superfund sites, environmental hazards
- lot size
- Act 319
- custom built, high quality, unique design
- alternative construction (ex: using entirely all reclaimed materials for a new construction house)
- conversions of barns, mills, and historic school houses into homes
- smart house technology
- LEED certified, solar energy,
- adjacent to busy road, train tracks, airport, commercial buildings
- view – golf course, river, city skyline
- new construction, age of house
- condition of the improvements
- square footage of the house
- design, style, floorplan
- # of bedrooms, bathrooms
- finished basement
- guest quarters, accessory units
- pool, poolhouse
- parking amenities
- barn, greenhouse
- professional sports courts
- equestrian amenities, proximity to horse trails
This is not an all inclusive list and, I am sure I have left more than a few attributes out.
Some of the criteria above are very rare in our market, and because of that we have been known to use comparable sales that settled 10 years ago, or located 50+ miles away.
Expanding a search is totally fine…. as long as we are not overlooking a more recent sale or a sale within closer proximity… AND we can explain why/how we did what we did.
Every day is a new adventure!
And, because we specialize in appraising unusual properties I am sure the list will continue to grow.
Hopefully, this gives you an idea of what appraisers are looking for when searching for comparable sales.
This post is all about how to find comparable sales in real estate appraisal.
