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Search Parameters and the Best Comparables
By Rachel Massey, SRA and Tim Andersen, MAI
Watch any house hunting show on HGTV and it is apparent that buyers often restrict their search for property to a price range. So why shouldn’t appraisers? We must all have heard one variation of this argument at one time or another. From a logical standpoint, it does “seem” to make sense because appraisers try to mirror the actions of buyers in the marketplace. The simple answer to this question is that by limiting our search to a price range, we are apt to miss the most potentially relevant comparable sale. Restricting the comparable search by price is one of the easiest ways to miss good data, as well as to analyze the market improperly.
Although buyers may limit their search to price, watch an episode of House Hunters some time and see what the agents show the buyers. Invariably agents will show something that is outside of the buyer’s range, either breaking the bank and going for the gold, or showing them something well below their expectations. The agent might show them something they never would have considered because of the current condition of the property, but in actuality, it meets most of their needs. Although buyers typically push the top end, they are often able to negotiate to a lower sales price. On the flip side, sometimes they will look at a property needing extensive renovations, and factor that into their overall budget.
We have something to gain by watching these shows, as they demonstrate how buyers often act. Savvy real estate agents don’t let the buyer’s price range constrain them from finding the right house. A good agent will try to determine the buyers “needs” versus their “wants,” and try to find properties that meet their needs. While the buyer may think their need is to stay within a certain price range, that range quite often does not suffice. Instead, the buyer needs to look at what is available and what substitutions there are when the desired property is not available.
As presented in the Appraisal Institute’s Appraisal of Real Estate, 14th Edition (pg. 30):
One sentence above was underlined for emphasis. Imagine a simple appraisal of a production tract-built ranch house, in a cookie-cutter neighborhood, with an abundance of 1,000-1,300 square foot houses. Most of the houses sell in the $200,000 to $225,000 range, so what happens if the appraiser restricts him or herself to that range? Is it possible the appraiser will miss a good comparable sale? Perhaps not, because of the uniformity of the housing. Even so, there may be a sale that just closed at $229,000 that is similar to the subject property in all aspects but which has new kitchen. Would that sale be relevant? Absolutely! It provides information about the market direction (increasing) as well as information about how the market reacts to that new kitchen. What about a sale that just closed last week for $195,000 which is similar to the subject in all respects? If the search criteria exclude that sale, it’s possible the appraiser may miss it, and some indications that the market is starting to decline.
Many appraisers review appraisals that restrict the search parameters to price, yet miss the house that sells across the street and is a model match. How could that happen? It can happen because the market is in decline (or increasing) and that house was one of the leading indicators of what was happening in the market. We are constantly seeing appraisals that clearly state their search parameters, which is helpful in understanding what the appraiser was looking for as part of that search. Yet we also continue to come across appraisals that use price as the sole or primary search criteria. Perhaps this has always been prevalent, but with the increasing requirements for disclosure of such factors as search parameters, we are seeing more of this practice.
In USPAP, Standard Rule 1-4 makes it clear to the appraiser that:
“In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results. (a) When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion”
By restricting the search for comparables solely to price, is it even possible that the appraiser is collecting and analyzing all information necessary, as required in Standards Rule 1-4? In the sales comparison approach is it possible that searching by price leaves out “sales data as are available”? Yes, it is possible, and is a failing that state appraisal boards are aware of.
What do we consider a similar property? We contend that the buyer of a 1,900-sqft house may well look at a 2,900-sqft house favorably and say that it is a substitute. Yet it is rare that the buyer of that 2,900-sqft house will consider the 1,900-sqft house a true substitute. For a sale to be truly comparable, the buyer of the sale would also need to consider the subject as a substitute, not just the other way around. Remember also that a comparable sale has the same highest and best use as does the subject property.
Since examples help, imagine appraising a 2,000 square foot ranch style house on two acres in a semi-rural area. The house was built in 2000 and has a full basement and two-car attached garage. Does it matter what you think the house is worth, or would the most logical search relate to a house that is reasonably similar, in a similar setting within the immediate area? Is it possible that by restricting the search to a price range, that value-indicative sales will be overlooked?
When informing your client of the search parameters, think of a disclosure such as this:
“Search criteria included all sales of existing housing built between 1990 and 2005, on one to three acres, in the Saline school district. The search included only houses that were between 1,500 and 2,500 square feet in above grade living area, with garage and basement. From these sales, I chose to include properties that were south of Bemis and east of Moon Road, in York Township. From this data, I included only sales that closed within the past nine months and had 12 available sales which were generally competitive. Of those 12 sales, I chose the ones that were most similar to my subject in terms of quality, size and styling. The others were considered but ultimately the sales included were, in my opinion, the best available.”
This type of description of the search parameters leads the reader to the conclusion that the appraiser has examined both the market and then extrapolated from that market data set what was relevant in comparison to the subject. The intended users of this appraisal can easily understand what the appraiser’s search parameters were, and even if they disagree with the value opinion, have a guide to what the appraiser considered comparable.
For a value reconsideration, this type of language can help restrict the use of rebuttal sales that are outside of the search criteria. This can be a side benefit of clearly expressing your search parameters related to size, age, distance and other competitive features. If the parameters are clearly expressed and the possible sales shown, such as in a “farm-list” or “CMA”, and those sales were part of the analysis, it is effectively a way of putting the brakes on a request to consider those sales. If they have already been analyzed and are not reliable for whatever reason, any request can just refer the reader back to where in the appraisal narrative this was stated.
Another reason searching by price is not sound appraisal practice is that, in essence, the appraiser, through this restriction, is appraising to a predetermined value, or range in value, a significant USPAP violation. Remember that restricting the search to price, as opposed to those value factors that truly drive the market for a property, such as the one that is being apprised, puts constraints on what the market is able to tell the appraiser and is a defacto predetermined range. Instead of restricting the search for comparables solely to price, look instead at the physical, legal, economic, and intrinsic attributes of the property, as well as what buyers would likely consider as alternatives. Look to similarities in properties, not similarities in a preconceived idea of price.
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Appraiser Adjustments: Solving Common Problems
By: Richard Hagar, SRA
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• Appraisal Adjustments: Solving Common Problems – Richard Hagar, SRA (two-part webinar)
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About the Authors
Rachel Massey, SRA, AI-RRS, is an AQB Certified USPAP instructor and has been appraising full-time since 1989. She is a Certified Residential Appraiser in Michigan, specializing in review work for various clients, as well as lake properties and other residential properties in and around the Washtenaw County market. Tim Andersen, MAI, is a commercial real estate appraiser, AQB-Certifed USPAP Instructor, USPAP consultant, author, and expert witness.