You may ask “what is the difference?” A sale is a comparable (comp), right? Wrong! A comp is a sale, but a sale is not always a comp. Does this sound confusing? If so, stay with me and I will try to explain the difference between the two. I hope I can give you better insight into why there is a difference and how it can make a huge impact in an appraisal.
First off lets talk about what a sale is. In the residential real estate appraisal business a sale occurs when a house has sold, usually between two parties, the buyer and the seller. Most sales fall under two categories: arms length sales and distress sales. The focus of this article is not really to discuss the differences between these two types of sales but just to let you know that there are more than one type.
In the appraisal business appraisers start out by considering all sales and then qualifying them based on their comparability to the subject. Some of the criteria that we look at include proximity to the subject, living area (square feet), age, style (design), condition, features, proximity to schools & employment areas, school systems, and time of sale. A comparable therefore is a home which is very similar to the subject property being appraised. Another way to look at it is to ask yourself if the potential “comparable” would be a viable alternative to the buyer of the subject property, and if it is then it could be considered a comparable. I have been provided sales for consideration in an appraisal that were really not that comparable. If the person that provided them to me would have asked themselves the above question they may not have included some of the ones they did. The home I was appraising did not have a swimming pool, yet a sale with a pool was included. A buyer looking for a house without a pool would not typically consider a house with a pool. Another situation occurred when a sale one block away from my subject property was included. The only problem was that the home was in a different municipality and school system. This emphasizes the point that proximity does not always qualify a sale as a comp.
Another reason to use sales that are more similar to the subject is that the amount of adjustments made to the comparables will be less. Typically the more adjustments made to a sale, the less comparable it is. In my last blog post titled “What is bracketing and why should Realtors do it?” I explained a method appraisers use when choosing comparables. This method should also be used along with the criteria listed previously because it helps to narrow down the best sales from an available set. In contrast, if a recent sale was used that was not qualified by the above items it might be necessary to make larger than ideal adjustments. The end result would be a value indication that did not accurately reflect the subject property’s value.
So you can see that just because a property sold recently does not make it a comparable. It must be compared to the subject using various criteria, and you must ask the all important question about whether the buyer would also consider a sale as a similar alternative. What are your thoughts on choosing comparables? Leave me a message below, I’d like to hear your take.