If you’re an appraiser, loan underwriter, or a real estate agent, you’ve probably heard someone say, “There are no comps (comparables or comparable sales).” This is understandable. Sometimes, depending on the approach to value, it feels like there are actually no comparable data. However, it is my opinion that there is always something to compare to the subject. Appraisers just need to look harder to find strong data or be willing to accept comparable properties that are not ideal.
When there are few comparable sales, an appraiser generally has six options to find comparable data. A description of those alternatives follows.
Expand the search to more distant places. Sometimes if the subject sold on the outskirts of town, expanding a radius search results in less than ideal comparable sales that are closer to town, less comparable, and difficult to adjust for location. A better approach might be to look for other areas that have similar proximity to town and/or similar underlying markets. This might mean going further than typically accepted, but it might also result in a comparable sale that is a stronger indicator of value, like a comparable sale that is on the other side of town, but similar in distance to the center.
It is understood that crossing from the east side of Portland to the west side for comparable sales does not work well because the neighborhoods represent altogether different markets with very different prices. However, if I was appraising a property on the rural eastern outskirts of Oregon City, there might be a strong comparable sale on the rural western outskirts that would be more comparable in terms of location than a property closer to the subject and nearer the center of town.
I once assisted on an appraisal of a house with a cell phone tower on the property. We used comparable sales that were close to the rural subject, but to support the adjustment for the cell phone tower, we looked at several sales scattered across the entire State of Oregon to measure how the cell phone towers influenced the sales prices of other homes.
Be willing to accept comparable properties that are less similar. Sometimes when searching for comparable sales, real estate experts can get tunnel vision and think that we are only going to accept a property as a comparable if it has a certain feature, is in a specific or competing location, or is within a certain range of living space, year built, style, and so on. I catch myself doing this from time-to-time. However, when the data is far less than ideal, appraisers need to open their minds to what is actually comparable. Appraisers should be focused on what types of differences can be quantified with strong evidence and then concentrate on finding comparable properties with those differences. For example, time or living space adjustments might be easier to quantify and support a credible adjustment than might location or condition.
Try a different approach to value. All three approaches to value rely on comparable data, not just the sales comparison approach. The cost approach requires comparable sales to estimate land value, depreciation, and cost. The income approach requires comparable data to estimate capitalization rates, rent, and expenses. However, if there are very few direct comparable sales, there might be plenty of comparable data for another approach. The appraiser might be able to easily estimate market rent and a capitalization rate for the income approach.
All of the above. When comparable sales are extremely limited, the appraiser can assemble a strong case for value by using a mixture of value approaches and comparable sales where some might be older than ideal, some might be more distant than ideal, and some might be less comparable than ideal. If a mixture of varied comparable sales and approaches to value are considered and, after a diligent adjustment analysis, the indicators of value all point to a similar range of value, then the appraiser has done their job and can reconcile a credible opinion of value.
Decline the assignment. If an appraiser believes that there are no comparable sales, or that the comparable sales cannot be located within the course of business, and that they cannot produce a credible value opinion, the assignment should be declined. Appraisals should be based on evidence and expert analysis of comparable data. Having no comparable data would mean having no evidence and therefore no credibility.
The following are some phrases that I prefer over, “There are no comparable sales.”
There are no comparable sales that are exactly like the subject.
There are no sales with the subject’s feature that sold in the past six months.
It is outside the scope of work for this assignment to continue searching for comparable sales.
It is going to cost an additional research fee to find and analyze comparable sales.
Additional sales were identified and analyzed, but the results are not conclusive.
Did I leave anything out or do you want to join in the conversation? Can you think of any additions to my list? Let me know in the comments below.
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Homeowners, real estate agents, and other appraisers often ask me for advice on how to select comparable sales. Selecting comparable sales is one of the most important things that an appraiser does and it can also be the most difficult. The Appraisal Practices Board Valuation Advisory #4 covers this topic, but the document is written for appraisers. Here are some thoughts that I have on comparable selection.
Most of the time, when selecting comparables, we are probably not going to have several homes that recently sold (under normal market conditions) that are exactly the same as the subject property. If we did, then comparable section would be easy. Without exact matches to our subject property, we need to select sales that bracket all of the home’s significant aspects including location, physical, legal, and economic conditions (including property interests, feasible uses, cash equivalency, etc...).
As used here, the term “bracket” means selecting comparables that are judged as superior to the subject property, and others that are viewed as inferior. Bracketing may be based on several criteria including square footage, age, location, and condition. Additionally, comparables should bracket overall value by having at least one property that is superior in most ways and another property that is inferior in most ways to most buyers. Bracketing allows appraisers to place the subject property in the middle of a range and to support dollar adjustments convincingly that are estimated for the differences. Also, if the subject is less unique and sits within a range of sales, it might be easy to rank those sales from low to high and know about where the subject’s most reasonable value should fall without having to make any adjustments.
Each time adjustments are made to a comparable sale, that sale becomes a less accurate indicator of value. Therefore, appraisers should not only try to select comparable sales that require the fewest adjustments, but also seek to choose comparable sales that require less subjective and more easily supported adjustments. Often, I will choose a comparable that might have an older sales date over a more recent sale from a different location, because adjustments for market change or time can often be more easily supported with quantifiable statistical data than a location adjustment. Making judgment calls like this is where comparable selection becomes difficult and requires a great deal of market and neighborhood experience to do correctly.
It is important to recognize that the strongest indicator of value for a very unique property might have very high adjustments compared to the strongest indicator for a more common home. There is no limit on the size or quantity of adjustments that appraisers can apply to a comparable property, only that they should attempt to find the most comparable properties, they should be able to explain why one comparable was selected over another, and they should be able to explain why adjustments are (or are not) warranted.
There is no rule that appraisers cannot use distressed sales like bank owned properties (REO) and Short Sales (a property that sold for less than the loan amount under an agreement with the bank to avoid foreclosure) as comparable properties. These properties should be avoided when there are more comparable sales available. However, REOs and Short Sales typically sell for less than transactions without distress and should not be omitted by appraisers, as some articles in the press have suggested. If a REO just like the subject property sold for $190,000, then that might be strong evidence that the subject is worth as much or more than $190,000.
Properties that have been listed for sale but have not sold can also be strong indicators of value. These comparable listings should not be relied on too heavily to estimate a market value, but listings can be particularly convincing at indicating what the subject property would compete with if placed on the market and what a subject property is not worth. For example, if an almost identical property has been listed for a normal market time at $200,000 and did not sell, it might be strong evidence that the subject is worth something less than $200,000.
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One of the most important parts of the real estate appraisal process is verification of comparable sales with a party to the transaction. Appraisers cannot properly do their job without interviewing the people who are involved in comparable sales. In Oregon, licensed appraisers are required to disclose, “…whether the comparable sales analyzed in the appraisal report were or were not confirmed by a party to the transaction or an agent or representative of a party to the transaction.” (Oregon Administrative Rules 161-025-0060) In a perfect world, the MLS (multiple listing service) and county records would divulge all needed information about a comparable sale, but this is not the case. The MLS information is intended to market property by highlighting the most desirable features. Typically, the MLS will not point out the negative aspects of a property. Nor does MLS provide appraisers with information about what happened behind the scenes of the sale such as repairs, concessions, or the motivations of buyers and sellers.
I often speak with other real estate appraisers about verifying comparable sales. Many residential appraisers tell me that the only question they ask the agent is, “Did this sale have any concessions?” When I call and talk to agents, they often think concessions are the only thing I’m looking for and are surprised when an appraiser probes more deeply into the circumstances of the sale.
Concessions may be an important question not easily answered thru other sources in Oregon. However, only asking about concessions fails to provide a complete picture of the sale, which makes appraisers look unprofessional to the real estate agents answering such questions. Real estate agents know that there is much more involved in contextualizing a comparable sale than just concessions, and agents do not want their time wasted by unintelligent appraiser questions.
The following are some tips for interviewing agents, and a list of questions that I find useful when verifying comparable sales:
Tips for appraisers to remember when verifying sales:
1. Appraisers should consider using the phone for very important or complex comparables. The phone works best because it gives the appraiser a chance for follow-up questions and the results are instant.
2. Email questions should be sent out at least 24 hours before needed. Some agents only answer emails once per day.
3. Do not ask questions that can be answered by reading the MLS. If appraisers waste the agent’s time with dumb questions because appraisers haven’t read the listing, they may not want to help us next time.
4. Be grateful for any information that is provided by the person interviewed, even if they refuse to answer due to privacy concerns. Let real estate agents know that the most important thing is that appraisers ask the questions in order to fulfill due diligence requirements.
5. The buyer’s agent is a good source of information when appraisers want to know how the buyer was feeling. Did the home buyer think that the pool added value, was it just there (no positive or negative), or were they going to remove it? Did the buyer think the view added value or was it just there?
Things that appraisers might want to ask questions about if there is insufficient information in the MLS listing:
1. Distress: Find out if buyers or sellers were under any pressure to buy or sell.
2. Condition: Agents often do not know how to answer questions about condition and when asked will often reply, “Condition was good.” The problem is that one real estate agent’s good is another agent’s average, and so on. Therefore, appraisers need to ask in ways that helps real estate agents better describe the property. Use phrases like “well cared for,” “deferred maintenance,” and “necessary repairs” in questions (See example questions below).
3. Financing: References to financing terms like “cash,” “contract,” or “other” typically require explanation from the appraiser.
4. Views: Did the buyer care, or was the view the only reason they purchased the house?
5. Pools: Did the pool need work? Did the buyers desire a pool?
6. Outbuildings: Do appraisers know exactly what outbuildings there were? I commonly see listings that reference a garage and a shop, however, it frequently turns out that the property merely has a single outbuilding that could be used as either a shop or a garage.
7. Basements: Do appraisers know how much basement area is finished or unfinished?
8. Externalities: Did the buyer care about the busy road? A buyer in a very low inventory market or who plans to rent might not think of a busy road as a negative factor because such roads make for easy renting and walking access to bus stops, and so forth.
9. Concessions: Not only do appraisers need to know of any cash give backs or financing buy downs, equally important are concessions negotiated as a result of a repair that the buyer would need to make.
10. Repairs: Knowledge of which party (buyer or seller) paid for repairs before or after closing is important. If repairs are done prior to closing, or reimbursed just after closing, then the cost is part of the sales price and does not need an adjustment (if the repair is included in the overall condition assessment).
Example questions for appraisers when verifying a sale: (DO NOT ASK ALL. SELECT ONLY THE APPROPIATE QUESTIONS GIVEN THE COMPARABLE PROPERTY AND THE SCOPE OF THE ASSIGNMENT.)
1. General questions:
a. Were the buyers or sellers under any additional pressure to buy or sell due to deadlines, finances, family, court orders, et cetera?
b. The MLS shows the subject just sold but the county records do not show the sale yet. Can you verify the sales price was ______ and sales date was ______?
c. The subject had a basement and I cannot tell how much area was finished by looking at the MLS and county records. Can you explain?
d. Financing Terms:
1. The subject sold by cash. Do you think it could have been conventionally financed?
2. The subject sold by “other” terms. Can you explain?
3. The subject sold by owner contract. Were the terms of the contract consistent with what the buyer could have received with conventional financing? Could the property have been financed?
e. The subject had a view of _________. Was the view much of a positive factor for your buyer? It is difficult to judge the view from the street?
f. The subject had a pool. Was this a positive factor for your buyers? On the other hand, if you are interviewing the selling agent ask if the pool made it easier to sell this property.
g. This property looks like it sold for less than other similar properties. Is there a reason for the difference that I might be missing? (This is a good question to ask when the appraiser is puzzled by one comparable sale that does not seem to fit with others.)
h. Were there any concessions (including special interest rates) paid by the seller? Were the concessions negotiated as a result of any necessary repairs?
i. Was there any significant personal property included in the sales price?
2. Questions you might ask about a fixer:
a. Did the property have any major structural or mechanical problems?
b. Did the property have any recent updating?
c. Do you know if the buyer planned to renovate the property?
3. Questions you might ask about a new house:
a. Was the property a presale or a spec house?
b. Did this property come with rear yard landscaping?
c. Did this property have any features added after listing that might not show on the MLS (e.g. air conditioning, etc.)?
d. Was there any personal property included in the sale (e.g. washer, dryer, refrigerator, etc.)?
4. Questions you might ask about a house that is only a few years old:
a. Was this property well cared for and/or lightly lived in?
b. Were there any repairs that the buyer would need to make after closing?
5. Questions that might be asked about an updated older house:
a. It looks in the MLS like this property had some updating. Can you explain if the updates were done right before selling or at a different time?
6. Questions that might be asked about a house that was renovated by an investor:
a. It looks in the MLS like the property was purchased by an investor and renovated. Was there anything that was not, “like new” after the renovation?
7. Multi-family questions:
a. Was the property fully rented at the time of sale? If so, was rental month-to-month or was there an extended amount of time left on the leases?
b. Was the property rented above or below market rate?
c. Was the property purchased by an experienced investor?
d. Were the tenants going to stay? (If it was going to be vacant, there is a cost to rent up the property.)
8. House with subdivision potential or extra lot questions:
a. Did the buyers plan to develop or divide the extra land?
b. If so, can you explain to what extent and when?
c. Was there any difficulty with financing due to the development potential?
d. Did the buyers or sellers have an idea what the extra lot or lots would be worth once they are ready to build with utilities and access? (This question helps me to understand investor expectations.)
e. Are you aware of any barriers to the development of this property?
f. Do you know what the expected costs were to make the lot or lots build ready?
g. Do you know if any outbuildings or garages would need to be removed in order to divide or develop the property?