Comparables, also known as comps and are used in appraisals as one of the approaches to value the property. The other two approaches are the income approach and the cost approach. Comps are currently closed sales and pending, contingent, or active listings.
Comps provide a realistic indication of the value of homes in a neighborhood. The reason for this approach is to find similar properties that compare the subject that have recently sold or been listed to show what homes are selling for and what people are currently willing to pay.
Guidelines for Comps
These approaches are not created by appraisers, Fannie Mae requires appraisers to provide at least three closed sales and two active, pending or contingent sales in each appraisal. The appraiser can provide additional comparables beyond requirements to help better support their value.
How Far Should a Comp Be From the Subject?
In most cases the closer the comparable is to the subject the better. To get the best indicator of the value, comparables from within the subject’s neighborhood are used. This is not a requirement and there are circumstances where the appraiser must go into competing neighborhoods to find comparables, although, not ideal it is often done. Ideally comparables should be within a one-mile radius of the subject property.
The reason for staying so close to the subject is to determine what that property is worth in that specific neighborhood. The school district, shops, streets, etc. of a neighborhood all affect the value. If the appraiser does need to use comps from a competing neighborhood, it is important to make sure it is similar in style, quality, home age, transportation, schools, etc.
How Old Can the Comp Be?
How old can a comp be? This is a question we get a lot, it seems straight forward, but many people do not understand the importance of a recent comparable. In most cases the more current the sale the better. It gives a better understanding of the current market if the comparables being used have recently sold or recently listed.
This is most noticeable in a volatile market because if prices are increasing or declining it can greatly affect the home value and time adjustments will need to be made for sales that are not current. The most current sales will give the most accurate snapshot of the market.
One Sale Does Not Make a Market
As previously mentioned, at least three sales are required in an appraisal. This is to show support of the value. One home selling for high or low in the area does not reflect the current market value. You need multiple comparables to support the value.
With each comparable the appraiser will adjust for items that are different from the subject property that will help explain how the value was determined. You need multiple comparables to provide a true, unbiased value and in some cases the lender will request additional comparables to better support the value. So just because there is one property that sold high in your neighborhood, that does not mean that your property is also worth as much.
To sum up this blog, finding multiple comparables that are as close in similarity to the subject as possible will give you the best idea of what the property is worth and is one of the major approaches the appraiser uses to determine the market value.
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