The key to the appraisal process is for the appraiser to determine the value of the property that he or she is inspecting. One of the essential tasks that helps appraisers arrive at an appropriate value is the use of comparable sales, or comps, which are the prices of recently sold homes that are similar to the subject property in terms of size, style and location.
There is no way to reach a fair conclusion of a property’s market value without examining how much other homes with similar characteristics have sold for. There is some debate however on what makes the best comp for a subject property and whether people can agree upon commonly used phrases, the word “recent” for example can be ninety days or less for one appraiser while for someone else that could go up to six months.
For appraisers it’s ideal to find at least three comps with identical traits like the number of bathrooms, bedrooms, the presence of a fireplace or garage and the square footage of the property. According to Ziad Najm of Cedar Real Estate in Orange County, “my rule of thumb is to choose homes where the square footage is not more than 10 percent higher or lower than that of the unit being priced.” This helps give an approximate range of comparison between the square footage of comps and the subject property.
The top priority for appraisers is to find comparables that are most similar to the subject because they provide the most accurate gauge of how much the main property in question is worth. If the subject and a comparable both have two bedrooms, two bathrooms, and are 1,800 square feet for example, then it becomes easier for the appraiser to determine the subject property’s overall market value.
The second priority in finding good comparable sales is the location and its proximity to the subject property. Whether or not they share the same neighborhood is important in determining property value, this includes the quality of the school district, its proximity to public transportation or shopping centers, if the houses are in a quiet, gated community or on a busy public road. These external characteristics should be considered when assessing a house’s value on the marketplace.
Sometimes it can be hard for the appraiser to find acceptable comps for a subject property, especially in sparse rural areas, so if it comes down to it, the appraiser may implement the cost approach as a means of determining the home’s value. According to Martin Wagar of Wagar & Associates, “you figure out what you pay for the land the house sits on, based on how much land is selling for in the area and what you’d be expected to pay to build that same property.” It may be necessary to widen search parameters to wherever the nearest other comps are in the region, which includes adjoining neighborhoods. Appraisers are expected to be precise with the comps they choose in a rural area compared to a cookie-cutter suburb and it will involve more reconciliation to arrive at an appropriate value, but there’s always a way for homes to be properly appraised no matter where they’re located in the country.
Another factor in the search for good comparables is the timing of sales and how recent they are. The more recent the sale, the better they reflect an ever-changing real estate market. Appropriate comps may sometimes not be found within a six month time span, particularly in less populated market areas, which is why similar characteristics and location respectively are considered more important. Depending on the market area and the turn-around time it may be necessary to focus on another factor first before working on the others. There can be significant errors that go into market transaction data which is why the appraisal process relies on multiple approaches to value before reaching a reconciliation. It is up to the appraiser to determine how to best analyze the property they are inspecting and what the best comps are to support their work.