How Far Away Do Appraisers Go for Comps?

Home appraisals establish a property’s market value for lending, buying, or selling. Appraisers rely on “comparable sales” (comps) to do this. This article explains how appraisers select comps, focusing on distance.

Understanding Comparable Sales

Comparable sales are recently sold properties similar to the subject property. Appraisers use these sales as benchmarks, based on the principle of substitution: a buyer won’t pay more for a property than for an equally desirable substitute. They identify properties a typical buyer would consider interchangeable, reflecting current market values. This approach relies on recent sales data for accurate valuation. Appraisers typically use at least three closed comparable sales, though more may be considered.

Geographic Proximity Guidelines

Proximity to the subject property is a primary factor when selecting comparable sales because properties in the same immediate area are subject to similar market influences. These include local amenities, school districts, zoning regulations, and economic factors. For urban and suburban areas, appraisers generally aim for comparable sales within a one-mile radius. This is a guideline, not an absolute rule, as comp availability varies.

In less dense areas, such as suburban neighborhoods with larger lot sizes, the acceptable search radius might expand to two to three miles. For rural properties, where homes are more spread out and sales are less frequent, appraisers may extend their search five to ten miles or more. Exceptions to typical distance guidelines are common for unique properties, properties in specific subdivisions that span a larger area, or situations where limited recent sales exist in the immediate vicinity. Appraisers must use professional judgment to determine the appropriate search radius, explaining their rationale if they go beyond standard distances. While lenders often suggest a one-mile radius, Fannie Mae emphasizes using sales from the subject’s neighborhood or competing neighborhoods, not a strict “one-mile rule.”

Other Key Selection Criteria

Beyond geographic proximity, appraisers consider other crucial factors to ensure the selected comparable sales are representative of the subject property. Physical characteristics are key, including gross living area, age, construction quality, and condition. Bedrooms, bathrooms, and features like garages, pools, or finished basements also determine comparability. Ideally, the size of comparable properties should be within 10-25% of the subject property’s size for accurate comparison.

Time of sale is important. Appraisers prioritize recent sales, typically within six months. In less active markets, sales up to 12 months old may be used if explained. Fannie Mae guidelines allow sales up to 12 months old, but the most appropriate sales aren’t always the most recent. Market conditions, such as whether it is a buyer’s or seller’s market, also influence which sales are relevant.

Finally, appraisers ensure comps are “arm’s length transactions” between unrelated parties under typical market conditions. Sales involving foreclosures, short sales, or family transactions are generally avoided as they may not reflect true market value, unless they represent prevalent market conditions and are identified.

Adjusting and Reconciling Comparable Sales

Once comparable sales are selected, appraisers adjust their sales prices to account for differences from the subject property. Adjustments are made to the comparable’s sale price, not the subject’s, to reflect what it would have sold for if identical to the subject. For instance, if a comparable has an extra bathroom, a negative adjustment is applied to its sale price. Conversely, if it lacks a feature present in the subject, a positive adjustment is made.

Appraisers follow a sequential adjustment process: transactional, market condition (time), location, and physical characteristics. After adjustments, the appraiser reconciles the adjusted sales prices of the comparable properties. This involves weighing each adjusted comparable’s strengths and weaknesses, considering its similarity to the subject and adjustment reliability. The appraiser synthesizes this data to arrive at a final opinion of value for the subject property, which should fall within the range of the adjusted sales prices of the comparables used.