When you have an appraisal done on a home, the appraiser looks at more than just the subject home (the home for sale). He also looks at comparable sales. The comparable sales are what the appraiser uses to derive the fair market value of the subject home.
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How do appraisers choose comparable sales and what are the guidelines? Let’s check it out below.
Understanding Comparable Sales
First, let’s define comparable sales. They are homes in the area that sold recently. They should be within a reasonable distance and have the same or similar characteristics as the subject property. The comparable sales all must be sold – they can’t be active listings or under contract. The closing must have taken place and the final price published.
How Old Can Comparable Sales Be?
The appraiser’s goal is to find comparable sales that sold recently. Just what is recently? Typically, the sales within the last six months are acceptable, but obviously, they want sales as recent as possible. The more recent the sale, the more accurate it will reflect the value of the subject property. If it’s not possible to find sales within the last six months, appraisers may have to go back more than six months, but it may reflect negatively in the subject home’s value.
What do Comparable Sales Need to Look Like?
Comparable sales should be as close to the subject property as possible. At the very least, they must be the same type of property. For example, comparing a single-family property to a townhome wouldn’t work. However, even amongst single-family homes there are differences. For example, there are ranches and two-story homes. While appraisers can compare them to one another, he/she would have to do a lot of adjustments to come up with a comparable value given the vast difference in the homes.
In addition to its size and home type, the homes should have similar features and amenities. Think of things like wraparound porches, decks, pools, specialty roofs, and room additions. In an ideal world, appraisers would find homes with identical features. Since that’s rarely possible, though, appraisers make appropriate adjustments but try to find homes as similar as possible to one another.
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Where Can Comparable Sales be Located?
Comparable sales should be within a reasonable distance – typically within one mile. However, the characteristics of the home’s location will determine the acceptable distance. For example, a home that is along railroad tracks would be worth much less than a home that backs up to the beach. The appraiser will look for comparable sales that have a similar environment to get an accurate value.
The Number of Comparable Sales
Appraisers typically look for three comparable properties when appraising a home. Having three comparable sales gives appraisers an average when determining the subject home’s value. It would be unfair to use one home that sold recently for a lower than average price. When there are other properties to compare it to, appraisers can get a better idea of the average value for the area without having values skewed one way or the other.
Why Comparable Sales Play a Role
Comparable sales give appraisers a baseline when determining your home’s value. It takes the subjectivity out of an appraisal, giving the appraiser concrete information to use in his/her evaluation. Keep in mind that appraisers will never use homes currently on the market. Sellers are free to ask any price they want for a home, but that doesn’t necessarily reflect the home’s true value. It isn’t until the sale closes that there can be a good indication of the home’s true value.
It’s the appraiser’s to find comparable sales that work best for the subject property. If you think you know of sales that bode well for the subject home, you can always suggest them to the appraiser. But most appraisers use the homes they think fit best in order to come up with a fair market value for your home that’s fair for you and the lender. The appraiser works for the lender and has their best interests in mind while ensuring that you aren’t overpaying for your home.
