Why You Should Qualify Comps
The comparable selection process is more than just picking the three highest sales in the neighborhood and then taking their average. I’ve heard that 90% of doing an appraisal is picking the right comps and I tend to agree. I think it’s important for those in the real estate business to know how appraisers qualify comps so they too can utilize the same methods in order to develop a more accurate list price.
The old saying about garbage in garbage out is very pertinent to the appraisal process. If you don’t qualify your comps you’ll end up using sales that are not even similar to your subject property. This is one of the main reasons I have a problem with services like Zillow with their Zestimate because they have no way to qualify sales being used in their Zestimate valuations.
The Qualifying Process
Today I want to share with you part of the process appraisers go through to qualify comps to use in an appraisal. Real estate agents can also use these tips to pick the best comps for their CMA’s (Comparative Market Analysis). Without the accurate information obtained through the qualifying process, an appraisal report wouldn’t be worth the paper it is written on.
The qualifying process starts with choosing appropriate comparables that are most similar to the subject property in various physical attributes. To do this it is necessary to know the quality and condition of the property, room types, additional features, as well as accurate square footage.
When you have this information you can perform comp searches using bracketing techniques. This will help narrow down the results to those properties that are considered good substitutes for the subject property.
A good substitute property would be one that a buyer would also consider if the subject property were not available. They would be similar in quality, price range, construction, location, and functionality.
After you gather all of the recent sales that you consider to be similar to the subject property it’s time to start qualifying them. By qualifying them I mean that you should verify the accuracy of all the data that you have on them in order to make sure you are using the most similar sales available.
This data usually includes terms of the sale, accuracy of the physical attributes like square footage, bedroom & bath count, land size, as well as information on any updating the property has had.
Terms Of Sale
When verifying information about the terms of sale we want to see if the interest rate was market rate or whether the seller contributed more money than is typical for the area. These two things can result in a price that may be higher than typical which is important to know when you are using it to gauge the value of another property.
If a home sold with advantageous financing terms, which resulted in the sale price being higher than normal, you should keep this in mind and know that the home you are valuing may be less if everything else is equal.
Square Footage
When verifying the physical attributes of a comparable it is important to make sure you have the most accurate information possible. This is especially true for the gross living area, or square footage of the home.
This is one area that I have found to be the most inaccurate in MLS listings. This information is so critical that the accuracy and source of square footage has a direct impact on how long it takes to sell a home and for how much it sells for. Read my post about the relationship between the source of square footage and sale price.
Features And Updates
In addition, it is important to know the other features of the home so that you can compare apples to apples. If only properties that are superior in features are used you will always overvalue the property you are pricing.
Lastly, it is important to know about updates the comparable has had. Again, you need to know this so that you can compare like properties. If you compare a home that has not had updates to one that has you will need to keep this in mind and account for it in pricing.
Conclusion
The qualifying process ensures that the most appropriate and comparable sales are used so that your value estimate is accurate. As you can see, developing a value estimate involves more than picking random sales but the additional work you put in will pay off in the end. If you would like to dig a little deeper about the comp selection process you can read my previous post on this topic.
Questions?
Do you have any additional questions about how to qualify your comps? If so leave a comment below and as always thanks for reading.
I would happily sign a petition to change MLS requiring square footage to be measured square footage with a drawing included. The swing in prices based on wrong square footage as well as blatant falsification is a very real. I don’t rely on any source in MLS other than “appraiser” or “building plans” (but they won’t let you use that if the house is past a certain age). Don’t get me started on Zillow, as if it is THE SOURCE for all accurate info. It is not.
Thanks for sharing, Kate. I agree that something should be done to make sure the square footage in MLS is more accurate. This will help agents price their listings more accurately for one and help the appraiser as well. I always tell agents that they can check the square footage on the appraisal that is being done for the most current sale and update the listing with that, and then going forward the information should be more accurate unless the home is added on to. I think we’re both on the same page about Zillow. 🙂
Hi Tom,
I would like to know if a 1 story home and a 2 story home with the same sq/ft would go for the same value? lets say they both have tile through out the home, as well as granite counter tops, both 4bedrooms and both 3 baths, and about the same size lot. Question #2 What would you do if you have a 1 story home and nothing but 2 story homes as comps would they be the correct comps to use?
And thanks for response.
So the question I hear you asking is this: if two homes are identical in every way except that one is a 1 story and the other is a 2 story will they appraise for the same amount? The answer will depend on what the comps show. I once appraised a home in a neighborhood made up mostly of retirees. Because they were older and did not like stairs the two-story homes typically sold for less, but no all neighborhoods will be like this. If it is made up of a younger demographic it may be different. The appraiser will need to look at and compare each sale to see if the number of stories impacts the value. If there is a difference in the two and there are no sales in the immediate subdivision the appraiser may need to go to another area to find sales.
I work in a number of rural markets where what’s traditionally considered a “comparable” property is commonly an oxymoron relative to urban markets. And in most instances, it’s necessary to cite numerous sales to bracket attributes and support adjustments. Reconciliation is effectively an aggregate of the cited sales. While most would prefer, if not strive to live in a “perfect” world, I enjoy the fact I get paid relatively well to appraise in an “imperfect” one.
I also work in some rural areas, Mark and understand where you’re coming from. In rural areas, you can throw out lender suggested guidelines like distance, time of sale, and adjustment percentages as it is not always possible to find similar sales in a diverse area. Thanks for sharing.
Thanks Tom. I have something on my desk right now that just isn’t like anything else out there in the market. I am having to find other homes with similar quality and vibe even though they are very different in many ways. I mention this to say it’s not easy. We like to think comp selection is a piece of cake, and it is in a tract subdivision with 20 model match sales. But it’s not so simple in the real world with funky properties.
I totally agree, Ryan. While some appraisals are pretty straight forward there are many others that require more work to find similar sales and to investigate them to make sure they are truly comparable and “qualify” for use.
Great topic Tom! Many times over the years, I have been given “comps” that were not really comparable. The primary reason is that the person providing the sale to me didn’t take a closer look at the things you noted. Thanks so much for writing on this topic! Great post, as always!
Thanks, Jamie. I have been given sales too that it would appear were found by using a “dartboard” technique or worse yet were chosen because they sold for more than the sale price of the home being appraised. The comp selection and qualification process is more important than many think.
Do you ever turn a job down after inspecting a property due to there being no comps at all the contain a major feature or combined features such as an older home with a new in ground professional size swimming pool and the pool is not exterior but inside and enclosed heated finished addition? Any suggestion are appreciated. Question 2 – I turned this exact job down and the homeowner asked how do they know what to ask for their home before offer for sale? I called them a few weeks later to see what they ended up doing and to my surprise they said they got another appraiser who performed an appraisal. I asked if that other appraiser included comps with pools such as I described above. They did not text me a response.
I have had to decline an assignment once or twice because I could not find comps but not for the reason you gave. I think it the situation with the pool you have to do the best you can. You may not be able to find homes with interior pools but you may be able to use sales with outside pools. Some appraisals are not perfect but it is still possible to get a pretty accurate estimate of the market value.
Personally, I attempt to determine the assignment prior to inspection. This typically avoids post-inspection issues and allows me to quote an appropriate fee prior to acceptance and scheduling the inspection. I’ve never declined an assignment. However, I do charge accordingly. Many lenders don’t agree with it but, once it’s been shopped to the point that no one will accept it, they see the light.
I’ve had my fair share of “fun ones” to include a 17,000 s.f. Mansion on 63 acres with a single swimming pool that was both indoor and outdoor. I suspect in asking if the other appraiser included comps with pools, you were concerned with bracketing in underwriting. Here’s how I’ve handled this in the past.
If I had a subject with a rather extraordinary feature that’s somewhat “out of tune” with the primary improvements and/or market, I’d first go to a market as reasonably similar as is possible. I’d attempt to find sales with that specific feature. If they aren’t reasonably similar to the subject overall, I’d find sales of significantly similar properties in that market area with and without that specific feature and extract the value-related differences for that feature. This may or may not require a locational adjustment.
I then go back to the subject’s market and find features that, while specifically dissimilar, display significantly similar contributory value. This could be acreage or water frontage, but typically would be outbuildings and detached accessory units. While you haven’t bracketed the “indoor pool” specifically, you have reasonably and as supportively as is possible bracketed the contributory value of this feature. As Tom said, it’s not perfect. But it’s as logically and reasonably supportive as you’ll likely get and I’ve never had an underwriting issue with this methodology.