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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