Are you wondering, “Can You Use Comparables” to determine a property’s value accurately? At COMPARE.EDU.VN, we understand the complexities of real estate appraisals and how comparable sales (comps) are used. We’ll guide you through the guidelines appraisers follow, helping you understand what makes a good comp and how it impacts property valuation, ultimately providing solutions for understanding real estate pricing, assessment of property value, and comparative market analysis.
1. What Are Comparable Sales (Comps) and Why Are They Important?
Comparable sales, or “comps,” are recently sold properties that share similar characteristics with a subject property being appraised. These characteristics can include:
- Location: Proximity to the subject property.
- Size: Square footage of the living area and lot size.
- Age and Condition: Similar construction era and level of renovation.
- Features: Number of bedrooms and bathrooms, garage spaces, and amenities like pools or fireplaces.
The goal of using comps is to determine the fair market value of a property by comparing it to what similar properties have recently sold for in the same area. This is based on the principle of substitution, which states that a buyer will pay no more for a property than they would for a comparable alternative.
According to the Appraisal Institute, using comparable sales is the most reliable approach to real estate valuation.
2. Key Guidelines for Using Comparable Sales
Not all sales are created equal. Appraisers follow specific guidelines to ensure that the comps they use are relevant and reliable. Here are some of the most important factors they consider:
2.1 Size Considerations in Comparables
The size of a comparable property is a crucial factor. Ideally, comps should be within 20% of the size of the subject property, according to Fannie Mae guidelines. For instance, it’s generally inappropriate to use a 1,300 square foot comp for a 1,000 square foot subject property or vice versa.
Why is size important? Size directly affects the utility and value of a home. A significantly larger home typically offers more living space and features, justifying a higher price. Conversely, a smaller home may be less desirable to buyers seeking more room.
While some real estate agents and homeowners use a “price per square foot” analysis, appraisers are required to correlate to similar-sized homes to ensure an accurate valuation. Price per square foot can be misleading because it doesn’t account for other variables like location, condition, and amenities.
2.2 Distance and Location of Comps
Proximity is another critical element. Comps should ideally be within one mile of the subject property. This ensures that the comparable sales are in the same neighborhood and subject to similar market conditions.
Appraisers also consider major barriers like freeways, rivers, or railroad tracks. These barriers can significantly impact property values due to noise, traffic, or accessibility issues. If a property is separated by a major barrier, it may not be a suitable comp.
According to a study by the National Bureau of Economic Research, proximity to amenities and disamenities can significantly affect property values.
2.3 Same Town/City Requirement
In most cases, comps need to be in the same city as the subject property, even if a comp in another city is geographically closer. This is because different cities can have varying tax rates, school districts, and local regulations that influence property values.
For example, a home just across the city line might have a significantly different property tax rate, making it an unsuitable comp.
2.4 Timing: The Importance of the Closed Date
The closed date of a comparable sale is a critical factor in determining its relevance. The strongest indicators of current value are those comps that have closed within the past 90 days. These sales reflect the most recent market conditions and buyer behavior.
While pending sales and listings can provide insights into current market trends, appraisers do not consider them in their final opinion of value. These are merely indicators of what buyers and sellers are asking for, not what they’re agreeing to.
According to the National Association of Realtors, using recent sales data is essential for accurate property valuation.
2.5 Lot Size and Utility
The appraiser must consider the lot size and lot utility in the valuation. If the subject and all comps have flat usable lots, the appraiser will adjust for large variances in lot size.
In areas where lots are sloped, appraisers will estimate a lot’s usable area or “utility” and adjust accordingly. The important thing to remember is that a 40,000 square foot sloped lot will often not have any more value than a 10,000 square foot flat lot.
2.6 Addressing Adverse Influences
If the subject property is located near a busy street, school, freeway, railroad, industrial area, or cemetery, the appraiser must include at least one comparable sale with a similar location influence. This is necessary to determine if an adjustment is required for the adverse influence.
Why is this important? Adverse influences can negatively impact property values due to noise, traffic, pollution, or other factors. By including a comp with a similar influence, the appraiser can quantify the impact on value.
For instance, a home on a busy street might sell for less than a comparable home on a quiet cul-de-sac. The appraiser would adjust the value of the comp to account for this difference.
2.7 Bracketing Comps for Accuracy
Valid comps need to “bracket” the appraised value. This means that at least one comp needs to be priced higher than the appraised value, and one should be priced lower. Additionally, the appraiser must “bracket” each amenity of the home with the comps. For example, the appraiser must include homes that are larger and smaller than the subject to “bracket” the size of the home.
Why is bracketing important? Bracketing helps to establish a range of values and ensures that the appraised value falls within a reasonable range. It also demonstrates that the appraiser has considered a variety of comparable sales and has not cherry-picked comps to support a predetermined value.
2.8 Condo Comps: Inside and Outside the Complex
When appraising a condominium, the appraiser should ideally include comps from both inside and outside of the complex. This provides a more comprehensive view of the market and helps to determine if the condo is valued appropriately compared to similar units in the building and in the surrounding area.
If either are missing, underwriters often call for appraisal reviews.
2.9 The Impact of View on Property Value
If the subject property enjoys an unobstructed view of an ocean or a lake, for example, the appraiser must show the value of that view by using some comparables with a similar view and some with no view. Appraisers generally should not use “view comps” to support the value of a property with no view.
Why is view important? A desirable view can significantly increase property value. By including comps with and without similar views, the appraiser can quantify the impact of the view on value.
This is also a good example of why appraisers do not use the “price per square foot” analysis. If two homes are identical and one has an ocean view, and the other does not, the one with the view will skew the analysis.
2.10 Closed Date: Before the Inspection
Comparable sales must have closed prior to the inspection date of an appraisal. Appraisers cannot use comps that close after the inspection date.
Why is this important? The appraisal is intended to reflect the market conditions at the time of the inspection. Using comps that closed after the inspection would be like using future data to predict the past.
3. Common Mistakes When Selecting Comps
Choosing appropriate comps can be challenging, and there are several common mistakes that real estate agents and homeowners make. Here are some of the most frequent errors:
- Ignoring Location: Failing to consider proximity, barriers, and neighborhood characteristics.
- Ignoring Size Differences: Using comps that are significantly larger or smaller than the subject property.
- Using Outdated Sales Data: Relying on sales that closed more than 90 days ago.
- Ignoring Adverse Influences: Failing to account for factors like busy streets or nearby nuisances.
- Cherry-Picking Comps: Selecting comps that support a desired value, rather than those that are truly comparable.
Avoiding these mistakes can help you identify more relevant comps and better understand the value of a property.
4. How to Find Reliable Comps
Finding reliable comps requires access to accurate sales data and a keen understanding of the local market. Here are some resources you can use:
- Multiple Listing Service (MLS): The MLS is a database of properties listed for sale, maintained by real estate professionals. It contains detailed information about properties, including sales history.
- Public Records: County assessor and recorder offices maintain public records of property sales, including sales prices and property characteristics.
- Real Estate Agents: Experienced real estate agents have access to MLS data and can provide valuable insights into the local market.
- Appraisal Professionals: Licensed appraisers have the expertise and resources to conduct thorough market analyses and identify reliable comps.
By using these resources and following the guidelines outlined above, you can find comps that will help you understand the value of a property.
5. The Role of Adjustments in Appraisal
Even when you find comps that are similar to the subject property, there will likely be some differences. Appraisers use adjustments to account for these differences and arrive at a more accurate valuation.
What are adjustments? Adjustments are dollar amounts or percentages that are added or subtracted from the sale price of a comp to account for differences between the comp and the subject property.
Common adjustments include:
- Location: Adjustments for differences in neighborhood desirability, proximity to amenities, or adverse influences.
- Size: Adjustments for differences in square footage of the living area or lot size.
- Age and Condition: Adjustments for differences in the age of the property or the level of renovation.
- Features: Adjustments for differences in the number of bedrooms and bathrooms, garage spaces, and amenities like pools or fireplaces.
Adjustments must be supported by market data and should be reasonable and defensible. The goal is to make the comps as similar as possible to the subject property so that the sale prices can be compared apples to apples.
6. The Appraisal Process: A Step-by-Step Overview
Understanding the appraisal process can help you appreciate the role of comps in determining property value. Here is a step-by-step overview:
- Order the Appraisal: The lender orders the appraisal from a licensed appraiser.
- Property Inspection: The appraiser inspects the subject property, noting its characteristics, condition, and any unique features.
- Market Analysis: The appraiser researches the local market, gathering data on comparable sales and market trends.
- Comp Selection: The appraiser selects the most relevant comps, based on the guidelines outlined above.
- Adjustment Application: The appraiser makes adjustments to the sale prices of the comps to account for differences between the comps and the subject property.
- Value Reconciliation: The appraiser reconciles the adjusted sale prices of the comps to arrive at a final opinion of value.
- Appraisal Report: The appraiser prepares a written report summarizing the findings and providing the final opinion of value.
The appraisal process is designed to be objective and unbiased, ensuring that the property is valued fairly and accurately.
7. What to Do If Your Appraisal Comes in Low
If your appraisal comes in lower than expected, don’t panic. There are several steps you can take:
- Review the Appraisal Report: Carefully review the appraisal report to understand the appraiser’s reasoning and the comps that were used.
- Identify Errors or Omissions: Look for any errors or omissions in the report, such as incorrect property characteristics or overlooked comps.
- Provide Additional Comps: If you believe that the appraiser missed some relevant comps, provide them to the lender with supporting documentation.
- Request a Reconsideration of Value: Ask the lender to request a reconsideration of value from the appraiser, based on the additional comps or corrections.
- Order a Second Appraisal: As a last resort, you can order a second appraisal from a different appraiser. However, keep in mind that you will have to pay for the second appraisal, and there is no guarantee that it will come in higher.
By taking these steps, you can increase your chances of getting a fair and accurate appraisal.
8. How Market Conditions Affect Comparables
Real estate markets are constantly changing, and these changes can significantly impact the availability and reliability of comparable sales. Here are some market conditions to be aware of:
- Hot Market: In a hot market, prices are rising rapidly, and there may be few recent sales to use as comps. Appraisers may need to rely on older sales or pending sales to estimate value.
- Cold Market: In a cold market, prices are falling, and there may be many distressed sales (foreclosures or short sales) that can skew the market data. Appraisers need to be careful to avoid using distressed sales as comps, as they may not reflect the true market value.
- Stable Market: In a stable market, prices are relatively flat, and there are plenty of recent sales to use as comps. This makes it easier for appraisers to arrive at an accurate valuation.
Understanding the current market conditions can help you interpret appraisal results and make informed decisions.
9. The Future of Comparable Sales
The real estate industry is constantly evolving, and technology is playing an increasingly important role in property valuation. Here are some trends to watch:
- Automated Valuation Models (AVMs): AVMs use algorithms and data analysis to estimate property values. While AVMs can be useful for quick estimates, they are not a substitute for a professional appraisal.
- Big Data: The availability of vast amounts of real estate data is allowing appraisers to conduct more sophisticated market analyses and identify more relevant comps.
- Virtual Appraisals: Virtual appraisals use technology like video conferencing and 3D modeling to conduct property inspections remotely.
These technologies have the potential to make the appraisal process more efficient and accurate.
10. Can You Use Comparables: FAQs
10.1 What if there are no recent sales in my area?
In areas with limited sales data, appraisers may need to expand their search radius or use older sales. They may also need to rely more heavily on other valuation methods, such as the cost approach or the income approach.
10.2 Can I challenge an appraisal?
Yes, you have the right to challenge an appraisal if you believe it is inaccurate or biased. You can provide additional comps or point out errors in the report.
10.3 How long is an appraisal valid?
Appraisals are typically valid for 90 to 120 days. After that, the lender may require an update or a new appraisal.
10.4 What is a desktop appraisal?
A desktop appraisal is an appraisal that is based solely on data and does not include a physical inspection of the property. These are typically used for low-risk loans.
10.5 What is a hybrid appraisal?
A hybrid appraisal combines elements of a traditional appraisal and a desktop appraisal. A third party, such as a real estate agent, may inspect the property and provide data to the appraiser.
10.6 What if the comps have different amenities than my house?
Appraisers will make adjustments to account for differences in amenities. For example, if a comp has a pool and the subject property does not, the appraiser will subtract the value of the pool from the sale price of the comp.
10.7 Can I use Zillow or Redfin estimates as comps?
While Zillow and Redfin estimates can be useful for getting a general idea of property values, they are not a substitute for a professional appraisal. These estimates are based on algorithms and may not be accurate.
10.8 What is the cost approach to appraisal?
The cost approach estimates the value of a property by calculating the cost to build a new, similar property, and then subtracting depreciation. This approach is typically used for new construction or unique properties.
10.9 What is the income approach to appraisal?
The income approach estimates the value of a property by calculating the potential income that the property could generate. This approach is typically used for commercial properties or rental properties.
10.10 How can I prepare my home for an appraisal?
To prepare your home for an appraisal, make sure it is clean, well-maintained, and free of clutter. Provide the appraiser with any relevant information, such as recent renovations or upgrades.
At COMPARE.EDU.VN, we strive to provide you with the most comprehensive and accurate information to help you make informed decisions. Remember, accurate property valuation is critical for both buyers and sellers. Understanding how appraisers use comparable sales can help you navigate the real estate market with confidence.
Ready to make informed decisions? Visit COMPARE.EDU.VN today to discover detailed comparisons and expert analyses that simplify your choices.
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