A concerned agent called me the other day worried about what would happen if the appraiser could not find comps for a house that she was selling. I assured her that even though it looked like there were no comps, there probably were if you looked a little more. This provided a good opportunity to explain the process of how appraisers find comparable sales (“comps”), so I thought I would share with you what I told her.
Ideally sales comparables (“comps”) would have sold within 90 days, be within 1 mile of the subject, and fall within the 15% net, 25% gross, and 10% line item adjustment range suggested by lenders, however this is not always possible. I have never had an appraisal where I could not find comps, however with that being said, they may not have been the comps the lender would have liked. Short of making comps up (which I have heard does happen, just check your state appraisal licensing board) you have to work with what you’ve got. Let’s take a look at how an appraiser might handle these criteria when the sales aren’t perfect, and it looks like there are no comps available. Keep in mind that attempting to meet one criteria may cause you to fall short on another one.
Time of Sale- Lenders would like for comps to have sold within 90 days of the date of the appraisal because they will accurately reflect current market conditions. When no recent sales have occurred within the immediate neighborhood/subdivision you have two choices, either go back in time or go to another area that is considered similar to the subject. If you go back in time you will need to decide if there has been a change in the market from the date of the older sale to the current date, and if there has been then an adjustment will need to be made. A stable real estate market would probably not require and adjustment, however if there has been either appreciation or deprecation in home values then an adjustment is necessary.
Distance of Comparable Sales- In a perfect world the comparables used in the report would come from within the subject’s subdivision or immediate neighborhood. These sales will typically be the most similar and mirror the value trends the subject property is experiencing. When there are no sales within the immediate neighborhood then it is acceptable to expand search guidelines to other nearby areas that are similar to the subject, even if they exceed the lenders distance recommendations. Similar schools, municipalities, and access to jobs and transportation are all criteria that an appraiser will look for. In a situation like this the best question to ask is “what neighborhoods would a potential buyer look in if there were no homes available for sale in this one”? As long as the appraiser explains their reasons for choosing sales outside of the neighborhood the underwriter will usually accept it.
Percentage Guidelines- Whenever there are differences in amenities and features between two homes that a buyer is willing to pay for, then an adjustment must be made to reflect this. Lenders recommend that the net amount of these adjustments not exceed 15% of the sales price of the comp and that gross adjustments not exceed 25%. In addition, each individual line item adjustment should not exceed 10% of the sale price. A good rule of thumb is that the larger the adjustments the less comparable the sale is. Some of the major adjustments that are typically made to sales include differences in gross living area (square footage), land area, age, and additional features like swimming pools, fireplaces, fences, barns and other amenities. Sometimes the only sales available have different features than the subject, but you must still use them because they are the best available.
So you can see that even though you may think there are no comps there really are. They may not be the most ideal sales, so you must adjust for the differences and then reconcile a final value, hopefully emphasizing those sales requiring the least adjustments. Do you have any other questions about what appraisers do when there are no comps? Leave me a message and we can talk about it.