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.
Why Sales History of a property is important
I have mentioned in previous posts that appraisers are required to include the sales history of the subject property for three years past. This is a Uniform Standards of Professional Appraisal Practice or USPAP requirement. It is required for appraisers but can also be useful to agents, buyers and sellers, the history provides a story of the property which can be important when buying or selling a home.
If there is a significant difference in value between the current sales price and the previous sales price, it would be helpful if the agent could provide an explanation of how the new value was determined.
There are a few things that are big red flags to the appraiser when they are appraising a property. I want to take this time to share a few of those red flags with you to make the appraisal process as smooth as possible for everyone involved.
Although it may not always seem like it, appraisers want your deal to go through without a hitch. As an appraiser we are a non-biased party, meaning we do not gain or lose anything if the deal goes through or not. We are just trying to provide the true market value of your home so that the process is fair to everyone involved. In writing this my hope is that this may help clear up questions but also help make the appraisal process go smoother in the future. This way the agent will be prepared to answer some of the appraiser’s questions or provide information to help the appraiser understand the situation.
So here are some Red Flags I see most often.
The only time an appraisal report stays with a property is when it is financed with an
FHA or VA loan. When this type of loan is used a case number is assigned to it, and the
case number follows the property. For instance, if the original contract fell through due
to the contract price being too high and a new contract was written with similar price or
higher. It is possible that the old appraisal could affect the new contract.
Having said that FHA and VA case numbers are cancelled after 6 months so if the
contract goes into effect after that it would not be considered during the transaction. On
the other hand, conventional loans do not have case numbers therefore it would not
follow the property.
Finding a good comparable
Agents will often call our office because they are concerned, they cannot find any comparables
to determine the price of their listing. In most cases after a short conversation and some research
we can find comparables, it’s just a matter of knowing what to look for.
Where to look for comparables
The best place to find comparables is in the immediate neighborhood of the subject property.
Due to many similarities the properties will have because of the location this is always the best
option. Having said that if the other properties in the neighborhood are not similar in size,
bedroom count, etc. you would not want to use it as a comparable just because it is close because
there are very few other similarities.
Per Fannie Mae requirements the comparable sales used to determine the value of a home should
have sold within the last 12 months. However, using the most recent similar sales will give you
the best indicator of value.
One of the results of the recession in 2007 is that appraisers are required to include extra documentation of the properties they appraise. One of the ways documentation has increased is the number of photographs required. Appraisers used to only take a front, rear and street photo of the property but, they are now required to a lot more.
What is the Appraiser taking pictures of?
Anything that can increase or decrease the value of the property may be included in the appraisal. This can include items in the house, outside or next to the house. These photos are now required because it gives the underwriters a better idea of the condition of the property. Let me break this down for you.
I regularly receive questions regarding FHA appraisals and recently more clients have had questions regarding the rules for the heating and cooling system for an FHA, so I am going to take this opportunity to explain.
FHA Heating and Cooling requirements
When your home is inspected by the appraiser, they will inspect the heating and cooling system in your home. A cooling system is not required to meet FHA guidelines, the only guideline is that if there is one it must work. If it does not work the appraiser is required to note what condition it is in, what is wrong and how it may affect the marketability and value of the home. A heating system however is required per FHA guidelines and provide healthful and comfortable condition as well as meet the safety, soundness, and security rules for the property.
Agents and Appraisers have been rumored to not get along that well, but I would like to crush this rumor by saying this is not always true. Appraisers and realtors can benefit greatly from communicating with each other and I found this to be very true in practice.
The more information the agent can share with the appraiser the better the appraiser can understand the property and determine the best market value. Having said that discussing the value is not allowed so be sure to not share this information to keep it a unbiased appraisal.
I would like to provide a few ways that agents and appraisers can benefit from a good relationship and open communication.
Once more the appraisal industry is being put under question as to why they are important for the home buying and selling process. Currently, the FDIC, Federal Reserve, and the Treasury Department issued a joint proposal that would eliminate the need for an appraisal on mortgages for less than $400,000.
This proposal is being sold to consumers as a way to save money and time. This sounds appealing, however, the price of an appraisal is minimal compared to the what the loan officers and banks are making and as for the appraisal process there are various factors that could be changed that could shorten the time involved significantly, such as use of the Appraisal Management companies (AMC’s) being eliminated.
Are you a first-time home buyer? Does the appraisal process confuse you? Appraisals can be confusing which is why I would like to take a minute of your time to explain the appraisal process.