How Many Comps Are Required In An Appraisal?

What Are Comps?

how many comps are neededAs you may or may not know comps are short for “comparables“. Sales comparables are recently sold, listed, or contracted properties that would be a good substitute for the subject property being appraised.

Comps are used in the sales comparison approach to value. This approach is one of three that is traditionally used in an appraisal. The other two being the income approach and the cost approach.

Comps are used to provide an indication of value for the property being appraised. The underlying premise for this approach is to compare what other similar properties have sold for in order to estimate what someone might pay for the subject property

Appraisal Comp Guidelines

Fannie Mae, which is a Government-Sponsored Enterprise or GSE, provides specific guidelines as to the number of sales that are to be included in an appraisal. Fannie Mae requires at least three closed sales be included in the sales comparison approach.

Additional closed sales can also be included as well as any property that is currently under contract or listed for sale. One type of comp that cannot be included is one that you create by combining the cost of land with the contract purchase price of the house.

I specifically addressed this issue in a past post named “Why Appraisers Can’t Use Custom Built Homes as Comps“, where I explain why these types of sales do not provide a good indication of market value.

How Far Away Can Comps Be?

When choosing the best comps to include in the appraisal report the question of how far can you go to get them invariably comes up. While using comps from the subjects subdivision, or immediate neighborhood, is ideal it is not an absolute requirement.

The main thing that should be taken into consideration when choosing comps should be whether they are in a competitive market area. A competitive market area is one that a potential buyer for the subject property would also look if none in the subject’s neighborhood were available.

Some criteria for determining a competitive market area includes similar style, quality, and age range of homes. In addition, school systems and access to area employment centers and transportation routes could also be included.

How Old Can Comps Be?

Another popular question that I get involves how old the sale is or when the sale occurred. Sales that have occurred most recently will typically give you a better snapshot of what is currently happening in the market.

Anytime you have to use older sales you run the risk of involving market conditions as an adjustment factor. In a stable market, this is usually not an issue, however, when you have either an appreciating market or a declining market you will need to make adjustments.

You should always strive to use the most recent sales available so going to another neighborhood for newer sales would be preferable to older ones in the same neighborhood. The older sales shouldn’t be totally ignored, however, as they can give you some context for what is happening in the area.

One Sale Does Not Make a Market

As noted previously, a minimum of three sales is required so all of the sales should be factored into the final value reconciliation. An appraisal should not be based on only one of the sales used just because it may fall into the range you want it to, which is usually at the high end.

Reconciliation involves weighing ALL of the sales and then choosing a part of that range that reflects the physical attributes of the subject as well as the supply and demand characteristics of the area. When this is done it will give you the most accurate indication of buyer and seller behavior which the appraisal is trying to reflect.

Questions?

If you have any questions about comparable selection in an appraisal or CMA feel free to leave a comment below or contact me by phone or email. As always, thanks for reading.

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Comments

  1. All good stuff, Tom. It’s so key to look for a group of similar sales rather than get stuck on one “lone ranger” comp so to speak. Just like you said, one sale doesn’t make or break value, so it’s critical to not get too distracted by one really high sale or a really low sale.

    • True, Ryan. It could also go the other way where you base an appraisal (probably not a listing though) on one low sale. That is where the reconciliation part comes in and it is so important.

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