Ever been curious how appraisers search for comps?
My topic today about how appraisers search for comps is a continuation of a theme I’ve written about lately to assist
real estate agents in pricing their listings. As I have stated in the past, if agents know how to think like an appraiser and price their listings like appraisers, their list price and contract prices will probably be closer to what an appraiser’s opinion of value will be. This will reduce the likelihood of contracts falling through due to the contract being higher than the appraisal.
What drives value?
The price that a home can bring, as well as its appraised value, is determined exclusively by the features it has that positively drives value. Buyers don’t want to pay for undesirable features but they will pay for desirable or popular features.
When agents have a new listing that they want to determine a list price for, a good starting point is to know what features the home has that buyers are willing to pay for. Most real estate agents know the main features of a home that people are willing to pay for. A good starting point is to look at the properties location, gross living area (square footage), number of bedrooms and bathrooms, age/condition, and any other features that it has that you know of that gets buyers excited. The home may have a pool or even a finished basement with home theater. Whatever feature the home has that you know moves the needle on value should be considered when searching for comps.
The opposite is also true. Don’t use comps that have more desirable features than your house has or else your list price will be overstated. Since it is difficult to determine the contributory value of these extra features it will make pricing your home that much more difficult.
The search process
This process is what I have described in the past as “bracketing“, and agents should use it on every listing they have. Bracketing consists of choosing sales that are inferior, equal to, and superior to the subject in the features that you have determined to be money makers for the house. At the same time the sales should be the most recent that have occurred, preferably within the past 90 days if possible.
If none have occurred within this time frame then you can start looking for older sales. If I am not finding any sales within the past 3 months I will start looking at older sales. I will go back in 1 month increments, looking at 4 months, then 5 months, then 6 months, etc. until I have found 3-6 good sales.
Let’s say that we have a 1,600 sf house, built in 1993, built on a slab foundation. It has 3 bedrooms, 2 bathrooms, is in the Laurel Woods subdivision and the Helena school system.
- In a practical sense the comparable search looks like this:Start by choosing sales from the same subdivision and/or neighborhood. If sales are slim you can start moving out from this area.
- Look at sales within the same school system since schools can strongly influence home values.
- Choose sales that are between 1,300 sf and 1,800 sf. (+/- 10-15% of your home’s size)
- Limit the search to homes built between 1988 and 1998. I start at +/- 5 years of the age of my home and then go to +/- 10 years if no sales exist.
- Is built on a slab or crawlspace foundation similar to the subject. If yours has a basement then stick with sales that have a similar foundation.
- Have similar 3 bedroom, 2 bathroom configurations.
- Add any other feature you have determined to be significant in your listing. Sales with like features will give you a better indication of value.
This is a good starting point to look for the most recent and similar sales. Just remember that the more different the sales are from your property the more adjustments will need to be made.
I realize that most agents don’t make adjustments to their comps since they are not familiar with the process to do this. This makes it even more important to get the best sales possible or else the spread in sales prices of the comps can be such that they will not provide a reliable indication of value for your listing.
The more similar the sales are the more narrow the sales price range will be and the better job you will do in coming up with a market supported list price.
What now?
As I state previously, most agents will not be able to make dollar adjustments to the sales, however you can still use the sales in your pricing strategy. I’ve written in the past about how agents can use qualitative analysis instead of quantitative analysis to accurately price their listings.
With this method you don’t need to know adjustments amounts but instead you use a ranking system where you compare the features of the sales to your listing to get an overall positive or negative ranking that you can use to see how your property falls within the sales price range provided by the sales.
Conclusion
I hope this quick and easy tutorial on how appraisers search for comps will help you in more accurately pricing your listings. If you have any questions feel free to contact me and as always thanks for reading.
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Tom, great post. Your method for searching for comparable sales is similar to my method. I agree start in very close to the subject. To add to the conversation, when I start in very close to the subject, I also do not limit my other parameters much or at all. This is because I don’t want to somehow miss that sale that is just down the street that maybe was input in the MLS wrong. As I expand my search, I start limiting my parameters for features like GLA, site size, features, or try to zero in on features that I still need to bracket.
Great point Gary. I have missed sales also because of being a little to narrow on my parameters and from information being put into the MLS incorrectly. I think this is a good reason to at least review and consider sales provided by agents because they may know about a sale we are overlooking because it was input wrong.
Nice job Tom. I definitely start looking up sales in the immediate subdivision rather than doing a zip code or MLS area search. I find it’s often important to parse the difference between a “sale” and a “comp” too. Just the other day a real estate friend wanted to give an appraiser a “comp” that sold for 30-40% more than the contract of the subject property and was also 1000 sq ft larger. This one higher sale really wasn’t comparable at all. In short, it was a “sale” instead of a “comp”…. and that makes all the difference.
Sounds familiar Ryan. I have also found that one of the biggest issues with agents is trying to support a preconceived notion of value, usually suggested by the owner/seller.