How Are Comps Determined for Appraisal?
Uncover the systematic process appraisers use to select, analyze, and adjust comparable sales for an accurate real estate property valuation.
Uncover the systematic process appraisers use to select, analyze, and adjust comparable sales for an accurate real estate property valuation.
Real estate appraisal estimates a property’s value using “comparable sales,” or “comps.” These comps form the foundation for the sales comparison approach, a widely utilized method in both residential and commercial property valuations. This approach helps to reflect what buyers are willing to pay for similar properties in the current market.
Comparable sales, or comps, are recently sold properties with characteristics similar to the subject property. Their primary purpose is to provide market evidence, reflecting actual transactions that indicate current market value. Appraisers typically select a minimum of three recently closed sales that closely resemble the subject property in terms of location and other relevant features.
The sales comparison approach relies on these recent sales to establish a property’s market value. This method applies the principle of substitution, which states that a prudent buyer will not pay more for a property than the cost of acquiring an equally desirable substitute. This principle guides appraisers in valuing a property based on what a buyer would pay for an equivalent alternative.
Appraisers evaluate several criteria when selecting comparable sales for an accurate valuation. Proximity is a primary factor, with comps ideally located within the same neighborhood or competitive market area. Lenders often suggest using comps within a 1-mile radius in urban or suburban settings, though this can vary in rural areas or for unique properties. If suitable comps are not available nearby, appraisers may extend their search, but they must explain the rationale for using properties from competing neighborhoods.
Recency of sale is another element, as older sales may not accurately reflect current market conditions. Appraisers prioritize properties that have sold within the last three to six months. In rapidly changing markets, appraisers may consider sales up to 12 months old, making adjustments for market appreciation or depreciation.
Comps must also share substantial similarity in property type and physical characteristics with the subject property. This includes matching attributes such as square footage, number of bedrooms and bathrooms, and lot size. For instance, comps should ideally be within 10-20% of the subject’s square footage to maintain accuracy. Appraisers also consider the age, condition, and quality of construction, recognizing that a newer or recently renovated home will typically hold more value than an older one in need of repairs.
Key amenities and features, such as garages, swimming pools, or specific upgrades, are also considered for comparability. Appraisers look for properties with similar features that appeal to the same buyer pool. Furthermore, the sale must be an arm’s length transaction, meaning it occurred between unrelated parties acting independently and in their own self-interest, without undue pressure or special concessions. Transactions between family members, foreclosures, or short sales are generally excluded from the primary set of comps because they may not reflect true market value.
Once comparable properties are selected, appraisers undertake an adjustment process to account for differences between each comp and the subject property. Adjustments are applied to the comparable property’s sale price, not the subject property’s value. If a comparable property has a superior feature compared to the subject, its sale price is adjusted downward. Conversely, if a comparable property is inferior in a certain characteristic, its sale price is adjusted upward to reflect what it would have sold for if it possessed the subject’s superior attribute.
Common categories requiring adjustments include differences in gross living area or square footage, where appraisers might apply a dollar amount per square foot based on market data. Variations in the number of bedrooms and bathrooms also lead to adjustments, as these features directly impact a property’s utility and market appeal. The condition and quality of construction are significant factors, with adjustments made for wear and tear, recent renovations, or the original build quality. Properties in excellent condition or with recent updates receive positive adjustments, while those needing repairs see negative adjustments.
Differences in features and amenities, such as the presence of a garage, a pool, or a deck, also warrant specific adjustments. For example, if a comp has a pool and the subject does not, the market value of the pool is subtracted from the comp’s sale price. Lot characteristics, including size, topography, views, or privacy, necessitate adjustments to reflect their impact on value. Adjustments for the time of sale are made to account for market appreciation or depreciation between the comp’s sale date and the appraisal date, especially in volatile markets.
Appraisers determine the monetary value of these adjustments through various methods, including market-derived analysis, cost new, depreciated cost, or paired data analysis. After applying all necessary adjustments to the comparable sales, the appraiser reviews the adjusted sale prices. This reconciliation process involves weighing the most similar comps more heavily to arrive at a final opinion of value for the subject property.
Appraisers rely on various data sources to gather information about comparable sales and to conduct market analysis. The Multiple Listing Service (MLS) is a primary source for recent sales data, providing detailed information on listed and sold properties. Public records, such as those maintained by county assessor’s offices, recorder’s offices, and tax authorities, offer property details, ownership history, and sales data. Appraisers also leverage their own proprietary databases and accumulated records, alongside other specialized platforms for commercial real estate or builder data.
Appraisers conduct broader market analysis to understand prevailing conditions and trends that influence property values. This analysis includes evaluating supply and demand dynamics within the local market. High demand and low inventory typically lead to increased property values, while oversupply can depress them. Economic conditions, such as interest rates, employment rates, and overall economic health, significantly impact the real estate market. Lower interest rates, for instance, can boost buying power and increase demand, thereby influencing appraisal values.
Neighborhood trends, including growth, decline, or stability, are also assessed. Factors like local economic growth, new industries, or changes in demographics can affect demand and property values within specific areas. Appraisers also consider how distressed sales, such as foreclosures or short sales, are treated. These types of transactions are often handled differently or excluded from direct comparison because they may not represent market value under typical conditions.