When an appraisal is conducted on a property, an appraiser will look at something called comparable sales. These are what appraisers used to determine a subject home’s fair market value.
What guidelines do appraisers use to select comparable sales? Let’s find out.
ABOUT COMPARABLE SALES
Let’s establish what comparable sales are, first. They can be defined as properties in an area that have recently been purchased. These homes should be located within a fairly reasonable proximity, and have either similar or the same characteristics as a subject home. Comparable sales must only entail homes that have been purchased – they cannot entail properties under contract or active listings. The sale’s closing needs to have transpired, and its final price must be published.
COMPARABLE SALES: HOW OLD CAN THEY CAN BE?
An appraiser’s objective is to establish comparable sales based on homes that were recently sold. But how is “recently” defined? Generally, sales that transpired as far back as six months ago are acceptable. Needless to say, though, that the sales figures they want are the most recent ones. Newer sales provide more accuracy, and will reflect a subject property’s actual value. If finding sales that have transpired over the last half-year is not feasible, then an appraiser may need to look further than that. This is something an appraiser will try not to do, as the value of a subject home could be negatively reflected.
COMPARABLE SALES: HOW SHOULD THEY LOOK?
Comparable sales are ideally as accurate as possible in relation to a subject property. They should be, at a minimum, the same property type. For instance, contrasting single-family homes to townhomes would not work. Still, the differences are apparent even for single-family properties. For instance, there are two-story properties and ranches. Appraisers can contrast them to each other, but then they would need to make many adjustments in order to determine what the comparable value is based on the differences between the two places.
Besides the home type and size, properties must have similar amenities and features. Consider aspects like room additions, specialty roofs, pools, decks, and wraparound porches. Ideally, appraisers would seek out properties that have identical features. But because that is not always possible, appraisers need to make suitable adjustments while still trying to locate homes as close as possible to each other.
COMPARABLE SALES: WHERE ARE THEY LOCATED?
Comparable sales must be situated within a fair distance – generally within a mile. Having said that, the property’s location characteristics will establish a distance that is acceptable. For instance, properties situated along some railroad tracks may be worth less than properties along a beach shore. Appraisers will seek out comparable sales within a similar neighborhood in order to get the most accurate value possible.
COMPARABLE SALES AMOUNTS
Appraisers generally seek out a few comparable homes when they are appraising a property. A few comparable sales on hand provides appraisers with an average to work with when establishing the value of a subject home. It wouldn’t be fair to use a property that was recently sold for a price that was lower than the average amount. When other properties are available for comparison’s sake, appraisers obtain a more accurate picture of an area’s average value without any of them being skewed.
THE ROLE OF COMPARABLE SALES
Comparative sales provide a baseline for appraisers when establishing a property’s value. It removes subjectivity from an appraisal, providing an appraiser with concrete information they can use as part of the evaluation. Be mindful that appraisers don’t use homes that are on the market. Sellers can charge whatever price they choose for a property, but it won’t necessarily be reflective of its true value.
An appraiser’s job is to find certain comparable sales – ones that are best suited for a subject property. You can also tell the appraiser a selling price of a subject home if you know it. A majority of appraisers focus on properties they believe are best suited to sell for fair market value and contrasted to the potential selling price of your home. The price needs to be fair for both the lender and you. Appraisers work for lenders, and both will make sure that you don’t overpay for your property.