Real estate appraisers commonly use recent comparable sales (or comps) to help determine a property’s market value. In this article, we’re reviewing the basics of appraisal comps and outlining some dos and don’ts to consider when selecting suitable comparable sales for an appraisal assignment.
Take a deep dive into appraisal comps with examples, case studies, and practice problems in our CE course, The Sales Comparison Approach.
What are appraisal comps?
In real property appraisals, appraisal comps (also known as comparable sales, comparables, or comps) play a crucial role. These comps are recently sold properties used to assist in determining the value of a similar property.
Typically, an appraiser will select a minimum of three recently closed sales that closely resemble the subject property in terms of location and relevant characteristics. Then, they make adjustments as needed to develop a credible opinion of value.
This appraisal method is called the sales comparison approach. As one of the three primary methods used to value real property, the sales comparison approach is a critical tool in the appraiser’s toolkit.
Dos and don’ts of choosing appraisal comps
Follow these dos and don’ts to help ensure that relevant comparable sales are established:
Do welcome relevant comparable sales from real estate agents
While it’s not mandatory to select and use these furnished sales in your appraisal, it’s important to review them. This step ensures you haven’t inadvertently overlooked relevant sales while searching for suitable comparable properties. Real estate agents often possess valuable insights into the subject property’s market and sales dynamics, serving as a reliable source of information. For instance, they may be aware of sales where the property was underlisted due to the seller’s urgent relocation needs or where price negotiations occurred due to structural issues found by a home inspector.
As an appraiser, it’s important to remain receptive to information provided by real estate agents. However, it’s equally essential to conduct due diligence and verify the information with an independent source. If you discover other sales that are more suitable for comparison, it’s good appraisal practice to comment on these furnished sales in your appraisal report, along with an explanation of why they weren’t selected. This transparency enhances the credibility of your comp selection process.
Don’t use appraisal comps based on price
As an appraiser, you must provide an unbiased opinion of value. Selecting comparable properties based on price may inadvertently favor properties within a predetermined price range, rather than those genuinely similar to the subject property in terms of location, size, condition, and other relevant characteristics. To maintain objectivity and credibility, you should evaluate sales based on criteria that most accurately reflect comparability, rather than focusing on price.
Do focus on characteristics of the property
Identify properties with comparable square footage (including finished basements), number of bedrooms and bathrooms, lot size, view (e.g., waterfront), and amenities. Prioritize features that are highly sought-after in the property type and market. For instance, in the subject’s market, a mountain view could significantly impact the demand and marketability of a vacation condominium home.
Don’t use distant sales unless there is a valid justification
When feasible, try to include at least one sale close to the subject property in your sales comparison approach. If this requires comparing properties that differ in size or other crucial aspects, it’s still valuable because of the proximity factor. In cases where recent sales nearby are unavailable, consider using older sales or properties currently listed or under contract, and make the necessary market condition adjustments.
If you must select comparable sales beyond the subject’s immediate vicinity, conduct thorough research and provide a detailed explanation of how these neighborhoods compete with the subject property’s location. Clarify why it was necessary to extend the search radius, which may be warranted when appraising unique properties, properties in rural settings, or areas with limited available sales activity.
Do consider objective characteristics when selecting competing neighborhoods
Consider neighborhood characteristics that could influence market value, including but not limited to:
- The prevailing style, age, and construction quality of the homes
- Price trends and price range of the homes (such as median home prices, days on the market, resale activity, and absorption rates)
- Available amenities (e.g., public parks, greenways, or pools)
- Traffic conditions
- Current land use
- Geographic characteristics (climate, natural resources, recreational opportunities, etc.)
- Infrastructure
- Accessibility to major highways and public transportation
- Proximity to employment opportunities and amenities (schools, hospitals, shopping, etc.)
Don’t limit the number of comparable sales to three
You should not be limited to using only three comparable sales, because restricting the analysis to such a small pool may not accurately capture the market dynamics or reflect the full range of available data. By imposing such limitations, you may overlook relevant sales that could provide valuable insights into the subject property’s market value.
Additionally, certain properties may have unique characteristics or be situated in markets where finding three truly comparable sales is challenging. Therefore, allowing flexibility in the number of comparable sales enables you to conduct a more thorough and comprehensive sales comparison analysis, resulting in more credible conclusions.
Do use listings and pending (under contract) properties in rapidly changing market conditions
Apart from closed sales, information regarding listings and pending (under contract) properties can be utilized to illustrate the current market activity and the competition currently considered by potential buyers.
While it’s important to exercise caution since the final sale price is uncertain, listing comparables and pending sales are often beneficial: (a) for determining the upper limit of probable value during the final reconciliation, or (b) as guidance particularly in periods of rapidly evolving market conditions.1
What if appraisal comps are sparse?
What if you’re appraising a property in a remote area or a neighborhood where few sales have occurred lately? When comps are few and far between, you can expand your search parameters to include comparable sales that are older, farther away, or have dissimilar characteristics. But once again, you will have to explain why they were selected. Furthermore, you will need to make the appropriate adjustments to arrive at a value that is credible and defensible. Additionally, it is necessary to note such limitations and reconcile the reliability of the sales comparison approach in such situations.
Get more detailed advice on what to do when comps are few.
Learn more about appraisal comps and the approaches to value
Learn more about selecting appraisal comps and other tools and methods for producing credible appraisals with expert-taught courses from McKissock Learning. We have the largest online learning library with 100+ courses, from appraisal licensing classes to continuing education classes on The Sales Comparison Approach, The Cost Approach, The Income Approach, and a wide variety of other topics.
Written by Jo A. Traut. Jo Traut holds the position of Director of Appraiser Training at McKissock Learning. Jo has more than 27 years of experience in appraisal operations, appraisal valuation risk, and appraisal compliance and holds a CDEI (Certified Distance Education Instructor) designation from the International Distance Education Certification Center (IDECC) and is an AQB-Certified USPAP Instructor.
Source:
- The Appraisal Foundation, “APB Valuation Advisory #4-Identifying Comparable Properties,” 2014.
