I was speaking with a real estate agent recently and he mentioned to me that an appraiser, who was working on an appraisal of a house he was selling, told him that if he did not use comps from within the subdivision the house was located in he would get his license taken away. One of my main goals during the time I speak at Realtor events is to dispel misconceptions that may exist about how appraisers do their job, even when they are started by appraisers, and this is obviously one of them. This was a great opportunity to educate them on how appraisers determine where they will get their comparable’s from.
I’m not sure if the appraiser speaking with my friend was unaware, but an appraiser will not get their license taken away just because they used sales from another subdivision or neighborhood. When searching for comparable’s there are various criteria that an appraiser uses. Ideally the sales would have occurred within the immediate subdivision or neighborhood because these sales will give the best indication of market value and will reflect the forces that impact value the most, however if there have not been any houses that have sold recently then it is acceptable to look beyond the immediate subdivision and neighborhood.
A better phrase for which to describe the acceptable area to pull comps from is “competitive market area” which, simply put, describes an area that is influenced by its geographic and/or political/city boundaries. Properties within this area compete with one another in the eyes of potential buyers and they would not mind looking for a house in neighborhood B if there are none for sale in neighborhood A because home prices are similar, residents may attend the same or similar schools, and values are influenced in a similar way by other factors.
Within the Birmingham metro area where I work, one of the largest cities is Hoover and there are numerous subdivisions where sales were minimal in the past couple of years, so it became a necessity to move outside of the immediate area and use comps from similar but more distant neighborhoods. While comps were further away the residents attended the same schools, the neighborhoods had similar amenities, and many buyers would not mind living in one subdivision compared to the other. This is an example of a situation where the comps may not have been close in proximity to one another but they were from similar competing areas. There are other areas that I work in where it is o.k. to use comps from the adjacent city because all of the important factors that influence value are very similar. As long as the physical features of the home are similar the difference in location, school system, and access to areas of employment don’t matter because they’re all about the same. I don’t intentionally seek sales from more distant locations, or ignore sales from within the subdivision, however if sales are scarce within the immediate area it is acceptable to move beyond the neighborhood to other ”competitive market areas”.
So as you can see, there are many factors an appraiser considers when searching for comps, however each area is different and one area might allow you to use sales from areas farther away while other neighborhoods will not allow you to do that. I hope I have cleared up any confusion or misconceptions you may have had regarding how appraisers decide where to get comps from. If you have any questions about this just let me know and I would be glad to help out.