One of the most essential parts of any appraisal is the comparable properties that the appraiser chooses for the Sales Comparison Approach.
These “comps” are used to determine the value of your property, so choosing the wrong ones can have a positive or negative effect.
This article will go into detail about the appraisal comparable guidelines used by appraisers and the exact characteristics that appraisers look for in comps.
What are Comparables?
In most real estate appraisal reports for residential properties, the primary way of determining the value is by using comparable properties from the neighborhood and adjusting them for their positive or negative attributes compared to the subject property.
Sale Comparables, or “Comps” as most appraisers call them, are sales and listings determined by the appraiser to be the most similar to yours.
They are usually from your neighborhood, are recent sales, and are similar to your home in many ways.
In some neighborhoods, the comps will have a lot more similarities than others.
For example, if you like in a planned development where there are a few different models of houses, the chances that the appraiser will be able to find exact model match comparables is much greater.
Compare this to a house in the middle of nowhere, where the comparables may be miles away and not similar at all.
An example of comps in an appraisal report is shown below. As you can see, the three comparables in this grid are similar to the subject property in many ways. The first has a similar lot, view, style, room count, heating/cooling, and parking, amongst other features. Many similarities are apparent in the other two as well.
View our prior article for more information on how to read an appraisal report.
Appraisal Comparable Guidelines
When choosing comps, there are some general guidelines that most appraisers tend to follow, but none that are required by law.
Lenders have imposed guidelines over the years that appraisers are encouraged to comply with, but sometimes following these guidelines is not possible to produce a credible appraisal report.
The best practice for appraisal comparable guidelines is to find the most similar properties in the closest proximity that are the most recent sales. These are usually the comparables that will give the appraiser the best results when valuing your property.
Broken down characteristic by characteristic, the suggested guidelines generally look like this.
Location is one of the most important characteristics that should be considered when an appraiser chooses comparables.
The comps should always be in the subject’s immediate neighborhood or similar neighborhoods nearby.
The guideline set by most lenders when it comes to location is that the comps should be within one mile from the subject property.
In some neighborhoods, there will be plenty of comps to choose from in a one-mile radius, and in others, there won’t be enough. In either case, the comps should be from similar neighborhoods to the appraised property.
Comparable sales located in a different neighborhood not similar to yours could potentially lead to a significant value discrepancy, especially if the appraiser is unfamiliar with the area.
In the case that an appraiser cannot find comparables in the immediate neighborhood or similar neighborhoods nearby, they should expand their search radius or go further back in time.
Site Size (Lot Size)
When comparing site size or lot size, there is no suggested percentage that an appraiser should stay within, but there are some good rules to follow.
In addition to lot size, the appraiser should always take into consideration lot utility and topography.
The size similarity is most important, but the utility and topography can also play a big role.
For example, in many markets, a pie-shaped lot could be worth less than a rectangular one, just as a sloping one could be less than a flat one.
It’s common in my market to see larger sloping lots be worth the same as a flat lot that is half the size. Usability is of great significance here, where families are the main buyers.
As always, it is up to the appraiser to determine if these lot characteristics add or detract from the value, but these are all things that should be considered.
Another important feature an appraiser should look for is the home’s view.
There are no specific guidelines when it comes to view, but the view should always be taken into consideration.
Most properties will have a residential neighborhood view, woods view, or pasture view. There are typically no value differences between these.
The added value comes into play when the view is visible inside the house.
Properties with water views, city views, and golf views are almost always worth more than ones without.
Views should always be considered when appraising a property, and it is best to get comps with similar views to the subject property.
Condition and quality are the two biggest contributors to the property’s overall value. They can be large adjustments that should try to be avoided when possible.
Condition refers to the house’s current condition in terms of overall maintenance, depreciation, and updates.
In a standard 1004 single-family residential appraisal report, there are six levels of condition ranging from C1 to C6.
C1 condition is a brand new house, and C6 condition is a house that is falling apart and practically unlivable.
Quality refers to the materials used when building and/or remodeling the house.
Like condition, quality is measured in six levels, Q1 to Q6.
Q1 quality is high-end finishes, custom construction, and professional workmanship. Q6 uses the lowest quality building materials and may or may not have systems (Electrical, plumbing, etc.) you would see in a typical house.
When it comes to the guidelines for both condition and quality, as always, an appraiser tries to find comps that are similar in condition and quality to the subject property.
Because these can be some of the largest adjustments in the appraisal report, it is important that the comparable properties are similar or within one condition/quality tier in either direction.
The size or GLA is the total size of the property being appraised.
One guideline recommended by lenders and appraisal software is that the size of the comps should be within a 25% difference larger or smaller.
That means that a 1,300 square foot comparable is probably not a good option when the subject property is 1,000 square feet.
Using a 700 square foot house would be advised against as well.
It is best to stay within the 25% square foot difference because once you get outside of that, you get into different tiers of properties.
This makes it harder to adjust and can also be the difference between two completely different buyer pools.
A more drastic example would be a 4,000 square foot house and a 5,000+ square foot house.
Most likely, the buyers would not be the same, and it would not make a good comparable.
Best Practices for Comparable Sales
While location, lot size, view, condition/quality, and GLA are the places where the appraiser should be the most stringent, there are some best practices that they will try to follow.
When choosing comps, an appraiser will try to stay within a one-mile radius of your house.
Ideally, the comps should be in similar neighborhoods nearby, but staying within one mile is a general guideline.
The appraiser should never go to another city to find comps; if they do, it should at least have the same school district.
The appraiser will first look for comparables sold within the last six months. If there are not enough, they should go back further in time.
It is always better to find older comparable sales in the home’s immediate neighborhood than to choose a more recent comparable in a non-competing neighborhood further away.
A property that closed after the effective date of the appraisal should not be used as a SOLD comparable. It can still be included as a listing.
It is always important for an appraiser to try and “bracket” all features of the subject property.
“Bracketing” is a term used by appraisers to describe when the chosen comparables have superior and inferior features to the subject property.
That means that at least one comparable should have a superior characteristic, and at least one should have an inferior characteristic in the Sales Comparables grid.
An example would be, Comparable 1 has a larger lot than the subject property, and Comparable 3 has a smaller lot. Therefore, the lot size is “bracketed.”
While this is not a requirement, it is a best practice when it comes to valuing the property.
Adverse influences, or adverse conditions, can be explained as anything that has an adverse effect on your property.
These could be large telephone lines in your backyard, a commercial building across the street, or a high school behind your house.
These should always be adjusted for and mentioned in the report if the appraiser deems them to have a negative impact on your property.
In addition, the appraiser should always try to bracket the adverse influence with another comparable that has the same or similar adverse influence.
The property type should always be considered when choosing comps.
An appraiser should never use a condominium comparable for a single-family residence and vice versa, a single-family residence should never be used as a condo comparable.
While there are no legally binding rules or guidelines that an appraiser needs to follow in every report, plenty of appraisal comparable guidelines should be followed.
Essentially, it all boils down to finding the most similar, most recent, and closest in proximity comparables for your house.
These are the comparables that should be the most similar and the best at helping the appraiser determine the value of your home.
Frequently Asked Questions About Appraisal Comparables
As an appraiser, I always welcome any and all information the client provides me. If you know of good comps nearby, then feel free and give them to the appraiser. They probably already know about them, but I have had homeowners provide me with comps that closed off-market, or I just flat out missed in my research.
The more recent the sale, the better. Real estate markets are always changing, so the most recent comparables are usually the best. Appraisers typically start by searching 3-6 months in the past and will extend their search back to one year or more if there are no good comparables to use.
The closer the comparable, the better. Ideally, the appraiser should stay within your neighborhood or similar neighborhoods nearby. A one-mile radius is a general guideline when an appraiser looks for comps. However, if there are no good comparables nearby, they might extend their search further than one mile to find better comparables further away.
Every appraiser should have a membership to their local MLS (Multiple Listing Service), where all the local real estate transactions are recorded. This is the best source of comps for any appraiser. Occasionally, an appraiser might use comparable recorded on public records but never listed on MLS.
An appraiser will use the most similar, most recent, and closest comparables to your property. The best comparables are ones that a buyer of your home would also consider buying.
2 thoughts on “Appraisal Comparable Guidelines – What Do Appraisers Look For in Comps?”
Very good article. The 1004 form is not the easiest form to read if you are unfamiliar with it. New forms are coming soon!
Thanks, Joseph. And it’s about time!!!