How Many Comparables Are Too Many

[Deleted member 152047]

I think that if you need more than 6, adding more won't increase the credibility or reliability.

Use the best you have and as a very good reviewer once told me..." If you don't have good comps, use the best you have and tell me a good story".

More explanation beats adding more comps of dubious value.

Great advice!! In the commercial world I am ecstatic if I have 3 good comps. But if I am appraising a new Taco Bell and find 8 similar sales, i'll use them. Often times I am able to prove tweaks to the cap rate by analyzing the comparable sales.

 

[Gobears81]

...I was recently told that using too many comparables, more than 6 generally (4 closed, 2 active) is an indication that the appraiser doesn't know what they are doing and are "all over the place". I generally disagree with these "rule of thumb" thresholds that try to claim everything under the sun can be quantified by general guidelines

Sometimes you'll have great sales and poor listings, or vice versa, and you have to adapt to the data quality. I remember when appraising houses, there was a residential investor that I knew who was complaining about a "lowball" appraisal where the guy used seven sales and he was harping on that, so clearly there is something to that six comparable ceiling for competent residential appraisals, at least in the eyes of some readers. With that said, if you have great sales or listings that you feel would add support to some element of the analysis, I wouldn't feel bound by the six comparable ceiling, but if you do go over that number, you might make sure that your combination of comparables doesn't have any real weak ends that may give the impression of the appraiser throwing everything against the wall to see what sticks. When I do smaller warehouse appraisals, I might have seven sales in there, or six sales and one listing, as I felt that each one offered some comparability to the subject. I know a commercial appraisal firm that might have 20-sales in their appraisals, and I interpret that as an attempt to show that more data reflects a stronger conclusion, which isn't an approach that I necessarily agree with as some of those sales aren't really all that comparable.

 

[Michigan CG]

The quest to bracket is a noble one but necessarily a good one. There have been a few cases of state board sanctions where the appraiser used sales that were not comparable simply to bracket.

Extensive narrative is more of a friend than an additional comp that brackets the third garage stall that in all other ways is not comparable.

 

[Meandering]

...I was recently told that using too many comparables, more than 6 generally (4 closed, 2 active) is an indication that the appraiser doesn't know what they are doing and are "all over the place". I generally disagree with these "rule of thumb" thresholds that try to claim everything under the sun can be quantified by general guidelines, which in this case means using only 4 closed sales. Imagine the most complex property in the most rural community for instance, a manufactured house with a stick built addition and massive shop for instance, the odds of finding comparables which bracket the subject in only 4 sales is highly unlikely (based on my experience). Additionally, I have been made aware of a review assignment with 9 comparables (6 closed, 3 active) in the original appraisal and the client is seeking 2 additional comparables, this definitely doesn't promote using only 6 comparables... I would like to gauge your thoughts on this. My current opinion is that you should use as many comparables as you need to bracket the subject property's improvements and ultimately illustrate the principle of substitution with a thorough summary of why each comparable was included, weighted, or given minimal consideration in the overall analysis. Please share your thoughts, thanks!

Your quest is for the "most probable price" the market would pay, blah, blah,

The more support you have by the number of comps, the more support you have for "the most probable" instead of just "a price" the market would pay.

But when the market conditions are rapidly changing, up or down, 3 sales, 3 pending and 3 listings should provide support for rapid changing market conditions. And that includes when physical things go in and out of favor with the market. Be those things inground pools, hard wired cable tv in every room, "smart" appliances and similar changes that will drive residential buyers and sellers to both: pay to change, and pay more for to buy..

.

 

[Deleted member 152047]

The quest to bracket is a noble one but necessarily a good one. There have been a few cases of state board sanctions where the appraiser used sales that were not comparable simply to bracket.

Extensive narrative is more of a friend than an additional comp that brackets the third garage stall that in all other ways is not comparable.

State Boards....ugh....even one of my state board appraiser members said that he would NEVER choose to defend a report in front of the state board. We can choose to go in front of the state board for judgement or have an actual judge try the case. He said to go for the judge 100% of the time.

There are 4 appraisers (2 residential, 2 commercial), 2 AMC members, 2 of the general public, and 1 ED. They can't talk to each other about a case and maybe 2 of a 9 person board actually understands what I am doing? Nah, I'll take the judge all day every day.

I'll get off my soapbox, but the point is that most state boards don't have a clue. I agree with your second statement though.

 

[bnmappraisal]

I "liked" the OP because I can appreciate where they are coming from

As with all of our reports "it depends"

Generally, depending on client specific requirements/assignment conditions, my reports have between 3-6 "comps" (obviously 3 closed, but sometimes 3-5 closed and then 1-2 active/pending)

BUT

Sometimes, depending on the property, I may have 5-6 closed and 2-3 active/pending. These are rare but do happen for this or that reason.

I will say, the "average" report, an appraiser should probably not need more than 3-5 comps for the SCA (and by comps I mean mix of closed and active/pending)

 

[Raven59]

2 AMC members, 2 of the general public, and 1 ED

In this scenario, you would expect half the board not to know. If commercial, possibly eliminate the two residential or the two commercial if residential. Either way, you are probably less than 50% no matter what the report type is.

 

[Tim The Enchanter]

Great advice!! In the commercial world I am ecstatic if I have 3 good comps. But if I am appraising a new Taco Bell and find 8 similar sales, i'll use them. Often times I am able to prove tweaks to the cap rate by analyzing the comparable sales.

That's Taco Gringo.
Sounds like the tract house of the commercial world.

 

[RCA]

...I was recently told that using too many comparables, more than 6 generally (4 closed, 2 active) is an indication that the appraiser doesn't know what they are doing and are "all over the place". I generally disagree with these "rule of thumb" thresholds that try to claim everything under the sun can be quantified by general guidelines, which in this case means using only 4 closed sales. Imagine the most complex property in the most rural community for instance, a manufactured house with a stick built addition and massive shop for instance, the odds of finding comparables which bracket the subject in only 4 sales is highly unlikely (based on my experience). Additionally, I have been made aware of a review assignment with 9 comparables (6 closed, 3 active) in the original appraisal and the client is seeking 2 additional comparables, this definitely doesn't promote using only 6 comparables... I would like to gauge your thoughts on this. My current opinion is that you should use as many comparables as you need to bracket the subject property's improvements and ultimately illustrate the principle of substitution with a thorough summary of why each comparable was included, weighted, or given minimal consideration in the overall analysis. Please share your thoughts, thanks!

Well, it's more or less idiots trying to manage idiots. Like, nobody really knows what they are doing. Most of the reviewers are idiots. Yep. Although it is all relative. The reviewers think they are better than the appraisers they are reviewing. That may be the case. But I think the reviewers are idiots. Well maybe not. Their experience may be that in the realm of appraisers they typically review, the ones with fewer comps are better. It's more likely the case, the ones with fewer comps have smaller messes to clean up. Well whatever -

Here is the scoop. USPAP says you have to apply your adjustments CONSISTENTLY across all comps. So, if you create a model, i.e. a set of adjustments, the more comps you try to apply it to, the faster your model will break. So, IF in fact, you can apply your adjustments to a large number of comps and still get a narrow band on the adjusted prices, you are doing very very well. You are an expert. Otherwise, you are going to just create a big mess.

I have done appraisals in Pacifica and elsewhere, all difficult areas, and often use 9+ comp. Here is an appraisal from a ways back:

Comp Adj. Sale Price % Diff
Comp 1, $1,213,195, 0.03%
Comp 2, $1,211,799, 0.08%
Comp 3, $1,214,924, 0.18%
Comp 4, $1,215,866, 0.25%
Comp 5, $1,207,219 , 0.46%
Comp 6, $1,206,509, 0.52%
Comp 7, $1,230,169, 1.43%
Comp 8, $1,192,095, 1.71%
Comp 9, $1,235,656, 1.88%
Comp 10, $1,238,876, 2.15%
Comp 11, $1,174,596, 3.15%
Comp 12, $1,173,149, 3.27%
Comp 13, $1,252,709, 3.29%
Average $1,212,797

Consider that the GLAs ranged from 1,100 to 2,760 sf and the sales prices from $825,000 to $1,300,000, the condition and quality from near the bottom to the best. The adjustments were applied consistently across all comps without exception. This is not easy to do.

As to why so many comps? I am in an area where the subject can very easily be quite dissimilar from EVERY comp, so that you are completely dependent on adjustments for value. You prove the quality of your adjustments in two ways: (1) The consistent application of a model developed from a likely complex and sophisticated regression that few can really understand and (2) Applying your model to a large number of comps and getting a narrow band ( < 5% ) of adjusted sales prices.

 

[Terrel L. Shields]

USPAP does not specify how many comps or that they even have to be closed sales. One could do. Not that secondary market wouldn't have a cow.
But for IAG banks, I don't care about FHA or Fannie rules.
I normally present 3 closed sales from the list I pull. I had 20 comps for one I finished today. I chose one next door because of proximity despite it being nigh 1 year old. I chose one as similar age a little further down the street. The high one was recently remodeled. There was one smaller, one larger, one similar size. In reality, what I showed was one comp would be 100% of my weight with two supporting the value. But I could have used the same adjustments for any of the 20 and came out close. The issue as OP stated is in oddballs, not a cookie cutter like I was doing. Since stips are very rare in bank ( non-secondary market) work, the list is in my workfile.

On those rural unique problems, I am likely to make a grid laying out the value drivers, then rank 5 to 9 comps from top to bottom, then pick the most similar within the rank. No adjustments whatsoever. Ranking Analysis is also the way I do a lot of rural agricultural properties as well as oddballs like hunting cabins, multiple home properties, etc.

I also support sales with cost approach. First, it develops the land value "as if vacant and available for its highest and best use"... which is key to making accurate site adjustments. Then extraction in the comps helps refine values applied to other buildings, and finally the house. Key to me in most house appraisals is the effective age (age-condition if you will) and size (SF adjustment). At this point few if any adjustments are required.

Listings to me have little value in a grid, but gives an idea that market activity remains. DOM is more meaningful in assessing market velocity IMO. Listings in a rural area are pointless waste of time. No listings in a rural area rarely reflects anything, certainly not a seized up market.