You can have the latest map program, aerials and any other special effects to make your report look as attractive and professional as possible but if you choose the wrong comparables, your result will be the worst appraisal report possible. This article shows the best way to choose comps, especially when sales of properties are scarce or not similar to your subject.
Whether appraising a property for a lender under the Uniform Appraisal Dataset (UAD) or a non-lender, choosing the appropriate comparable sales in today’s market is the single most important item in arriving at your value. Therefore, it is important to understand what criteria are important in choosing the right comparable sales, especially when good sales are few and far between.
There are many ways to begin your research and choose your comparables that will give you the best results. When selecting your comps, focus on location, similarities to the subject and date of sale. Your selection may also be restricted by your client’s guidelines and not by what you believe to be appropriate comps.
What constitutes a good sale? The best answer is the sale that has the most similar attributes and the least amount of adjustments required, compared to the subject property and which meets the definition of an arm’s length transaction.
Sales in Substitute Neighborhood
What is a “substitute neighborhood”? A substitute neighborhood is a grouping of properties that have similar characteristics to your subject’s neighborhood and where the houses or condominium units are similar in price range, size, age and demand. With a shortage of good sales that have few adjustments, the appraiser sometimes has no choice but to expand the research area to include substitute areas. It is important if you go beyond your neighborhood boundaries to explain the shortage of comparable sales and the necessity for looking further away. Remember, there is no “one mile” guideline by Fannie Mae, Freddie Mac or FHA. This may be a guideline by a lender or appraisal management company (AMC) but it does not come from any quasi-government entity. Fannie Mae has instructed that appraisers set up neighborhood boundaries first, and then if need be, expand the choice of comparable sales beyond the neighborhood but, it says not to expand the neighborhood boundaries to fit the selection of comps. In your text addendum, explain why you need to go beyond your neighborhood for sales. You may find there are better sales in that substitute neighborhood that should not be ignored. Remember to think like a buyer. Would a buyer only consider the subject’s neighborhood or would the buyer consider going a little further out to a similar neighborhood to look for what they want?
Do you consider an older sale, say over one year, that is more similar to the subject, rather than a newer sale that is not similar and requires more adjustments? Not only do you have to consider the percentage net and gross adjustments for each sale, you should also consider the number of adjustments required. Would you rather have fewer adjustments with an older comparable sale or a more recent sale with many adjustments? Perhaps you would not want to consider the older sale as one of your first three comparables but it certainly can be considered as additional support. If your One Unit Housing Trends indicates a declining market, then you would be making a large negative market conditions (time) adjustment, but perhaps only one or two other adjustments, like size and other features.
While a more recent sale would require a small time adjustment, it may require many other adjustments. I would rather choose a sale with the least amount of adjustments than the sale that is recent but less similar. If your sale is within the last three months but considerably less similar to the subject, is that sale truly comparable? Again, it may not be your first or second choice but with a market conditions adjustment being your main adjustment, that older sale may be your best sale. Conversely, I would not consider a two-year old sale.