Picking Comps

[maryjo313]

I'm curious how comps are typically chosen, if there is a decent number available in the area. Would you include ones closest by even if they weren't that similar? Or just use one or two and then pick better ones a little further away?

I had a home purchase in process that has been completely derailed by the appraisal and I'm really upset and will have to wait and see if we can get the seller to extend the due diligence and/or pay for a different appraisal. But I'm curious if what I'm seeing is as strange as it seems to me and my realtor. The sale price was set at $212K which based on my realtor's examination of the market was an excellent price. (she's got over 20 years experience and a great track record, I do trust her judgement). Tax value on the home was at $248K although that was from a few years ago so definitely a bit high. List price was $219K which seemed pretty accurate for the size of the home and the local market.

Well, the appraisal just came back at $185K. A whopping $30K less than my sales price. There seem to be two main causes.

1. The square footage of the house from the tax records and MLS was incorrect, the sketch caused it to show as having 250 sq ft more than the appraisal determined it to have. So we're figuring about $15K or so less due to this.

2. The comps are just not particularly comparable, and his adjustments do not seem to reflect how the market would pay for the differences.

So my house is based on the new sq ft, 2500. The lot is 10152 sq ft. 4 BR. At sale price of $212K that is $84/sq ft

His comps were:

short sale - 3125 sq ft - 9583 sq ft lot - 4 BR - $196K sale price - $62/sq ft

Conv - 2178 sq ft - 8712 sq ft lot - 3 BR - $182K sale - $83/ sq ft

Conv - 2157 sq ft - 8712 sq ft lot - $175K sale - $81/sq ft

Conv - 2633 sq ft - 11326 sq ft lot - $215K sale - $82/sq ft


Pretty much everything else the same for the most part, same bathrooms, quality of construction, condition, age, etc.

The report said #1 and #2 were given higher weight since they were in the neighborhood. But his adjustments on the smaller homes was really tiny, he only bumped the adjusted price up only about $24/sq ft even though they were not only smaller in sq ft, but had one less BR (big deal for single family homes like these) as well as smaller lots. That's less than 1/3 an adjustment compared to the price per sq ft of the homes.

Final assessment of the home comes to about $74/ sq ft even though three of the 4 comps all have values above $80/sq ft and the one that doesn't is a short sale. He really only included one comp that truly is similar to the house I'm buying and that sold for almost the same price as what my sales price was. Yet he comes up with a value $30K less (due to the short sale and the low adjusted price on the 3 BR homes pulling the value down).

I just don't understand this, how does this make sense? There are some short sales around here, but they aren't all that common (the homes are in Wake Forest, outside of Raleigh, NC). To include one as one of the comps just because it was close to my house, when it's the only short sale in a couple miles just seems ridiculous. And then two of the other 3 are smaller, 3 BR homes when I am buying a 4 BR home. With an adjustment that doesn't come close to what the market would value that difference at. When there are plenty of home in a 3 mile radius that have sold that are far more comparable, why not include them instead of homes that aren't all that comparable just because they are closer? Is that how it's usually done? And does $24/sq ft seems like a pretty low adjustment per sq foot for homes that not only are smaller but have one less BR and smaller lots as well? When the typical price per sq ft for homes is over $80/sq ft, why would it be adjusted so little??

Am I missing something?? There's really nothing else on the report to explain this, the home is in beautiful condition, and he even remarks that it's in a very good state of repair for the market. All you have to do is figure out what the price per sq ft comes out to, and it's obvious that the assessment is off by a good margin.

It's almost certain the seller will refuse to this large a drop in price, particularly when it's clearly off from what the market would pay. He should agree to a drop due to the sq footage being off, but we're probably going to need to appeal this appraisal to get to a price he'll agree to, so I'd sure love any suggestions on how best to approach the appraiser to get him to adjust it. I know my realtor has other comparables that are closer to my house both in size and price but slightly further away, but I know it's hard to get an appraiser to change their mind so I sure would love suggestions. I won't be able to try to purchase again until I save up the $2K I've lost to get this far, so I am devastated that this appraiser may have killed this sale, it took me 3 months to find the right house, and now it's all falling apart because of this.

 

[maryjo313]

I went back to look at the comps my realtor had pulled, they were all sold at prices around $84-85 per sq ft. Which seems to be the typical sales price for this size home in the area, although we have seen some sell for $90, and upwards of $100 if really nice upgrades. In terms of comparable homes and neighborhoods. We couldn't find any comparable sales in this area, other than short sales, that sold as low as the appraiser put my potential home at.

So I just don't get how this appraisal thing works, it seems to be either problem picking comps, or the amounts used to adjust, if his adjusted price is very obviously below typical market values.

 

[George Hatch]

Having not seen the appraisal I'm a little curious why the appraiser would come in at the bottom of the range indicated by these sales. He or she apparently didn't think the subject property was as nice of these others.

Most appraisers (myself included) don't consider price/sf to be a meaningful mode of comparison for single family residences. It can work when the properties being compared are *extremely* similar to each other but that's not usually the case with homes.

The first thing to recognize about an $84/sf price indicator is that part of the $84 is the site value, part is the contributory value of the improvements, including the main structure, garages, porches, patios, etc; and part is the contributory value of all the fees and permits and utility connections and such that are necessary to turn a vacant lot into a home.



So if we look at the $80/sf indicator, $15 of it may go to the site, permits and fees and utility connections. Maybe $5/sf more will go to cover the garage and other site improvements, and the remaining $55 or $60/sf will cover the cost of the house itself. Of that, the "core" of the house will eat up the majority of the costs while an extra bedroom probably would be valued somewhere around $20-$25 per sf. That why the $84/sf in your comparison is meaningless to an appraiser - they know the extra bedroom isn't worth anywhere near half that.

Incidentally, whether buyers look at it this way or not, that's how they usually act to differences in size in the real world, and that's what an appraiser is trying to emulate in an appraisal.

In my experience the realty agents generally either don't know how to identify the comps that appraisers use or they simply ignore those criteria and pick their favorite comps by price as a means of making a sale. That's the same way they sell homes to people - they don't find the house first and then work on the price, they identify the price their buyers can pay and try to find homes to fit. As a rule most appraisers are aware of a lot more sales in an area than a realty agent would ever show a prospective buyer.

So "more similar but further away" becomes a problem right off the bat. If your broker can find more similar sales in the same areas as used by the appraiser then that's a different story but that doesn't seem to be the case in your situation.

The other thing to recognize is that spreading the costs of the expensive parts of a hose around on a smaller home make that cost/sf increase (the economists call it the economy of scale). It's even demonstrated among those sales you showed above - the smaller homes sold for less per sf than the larger homes. all else being equal it happens like this most of the time.

If you were going to use price/sf - which we never do - then a 2500 sf home would be based on a price indicator that's between the $62/sf for the 3100 sf home and the $82/sf for the 2100 sf homes - that's basic logic. As it happens, the $74 you're talking about is right in the middle of the range indicated by the 2 homes in the immediate neighborhood that bracket the subject's size. The homes from different neighborhoods are given less weight because their locations are not considered as similar.

This appraised value might be low, and you already indicated you'd pay less for it based on finding out it's smaller than advertised. Incidentally, I'd verify the size of the house for yourself. The appraiser's measurements might be wrong. Under the circumstances I think it's worth a 2nd look. Just don't expect any appraiser to go further afield than it takes to identify sufficient sales of otherwise comparable size.

 

[Thomas Fiehler]

YOu might consult with a local appraiser and have them review the original report. Now, the only people that pay attention to $/sq. ft. are agents and buyers/sellers and of course those silly TV shows on HGTV! APPRAISERS DO NOT PLAY WITH THOSE SILLY GUIDELINES.

 

[NORTON]

I'm curious how comps are typically chosen, if there is a decent number available in the area. Would you include ones closest by even if they weren't that similar? Or just use one or two and then pick better ones a little further away?

I had a home purchase in process that has been completely derailed by the appraisal and I'm really upset and will have to wait and see if we can get the seller to extend the due diligence and/or pay for a different appraisal. But I'm curious if what I'm seeing is as strange as it seems to me and my realtor. The sale price was set at $212K which based on my realtor's examination of the market was an excellent price. (she's got over 20 years experience and a great track record, I do trust her judgement). Tax value on the home was at $248K although that was from a few years ago so definitely a bit high. List price was $219K which seemed pretty accurate for the size of the home and the local market.

Well, the appraisal just came back at $185K. A whopping $30K less than my sales price. There seem to be two main causes.

1. The square footage of the house from the tax records and MLS was incorrect, the sketch caused it to show as having 250 sq ft more than the appraisal determined it to have. So we're figuring about $15K or so less due to this.

2. The comps are just not particularly comparable, and his adjustments do not seem to reflect how the market would pay for the differences.

So my house is based on the new sq ft, 2500. The lot is 10152 sq ft. 4 BR. At sale price of $212K that is $84/sq ft

His comps were:

short sale - 3125 sq ft - 9583 sq ft lot - 4 BR - $196K sale price - $62/sq ft

Conv - 2178 sq ft - 8712 sq ft lot - 3 BR - $182K sale - $83/ sq ft

Conv - 2157 sq ft - 8712 sq ft lot - $175K sale - $81/sq ft

Conv - 2633 sq ft - 11326 sq ft lot - $215K sale - $82/sq ft


Pretty much everything else the same for the most part, same bathrooms, quality of construction, condition, age, etc.

The report said #1 and #2 were given higher weight since they were in the neighborhood. But his adjustments on the smaller homes was really tiny, he only bumped the adjusted price up only about $24/sq ft even though they were not only smaller in sq ft, but had one less BR (big deal for single family homes like these) as well as smaller lots. That's less than 1/3 an adjustment compared to the price per sq ft of the homes.

Final assessment of the home comes to about $74/ sq ft even though three of the 4 comps all have values above $80/sq ft and the one that doesn't is a short sale. He really only included one comp that truly is similar to the house I'm buying and that sold for almost the same price as what my sales price was. Yet he comes up with a value $30K less (due to the short sale and the low adjusted price on the 3 BR homes pulling the value down).

I just don't understand this, how does this make sense? There are some short sales around here, but they aren't all that common (the homes are in Wake Forest, outside of Raleigh, NC). To include one as one of the comps just because it was close to my house, when it's the only short sale in a couple miles just seems ridiculous. And then two of the other 3 are smaller, 3 BR homes when I am buying a 4 BR home. With an adjustment that doesn't come close to what the market would value that difference at. When there are plenty of home in a 3 mile radius that have sold that are far more comparable, why not include them instead of homes that aren't all that comparable just because they are closer? Is that how it's usually done? And does $24/sq ft seems like a pretty low adjustment per sq foot for homes that not only are smaller but have one less BR and smaller lots as well? When the typical price per sq ft for homes is over $80/sq ft, why would it be adjusted so little??

Am I missing something?? There's really nothing else on the report to explain this, the home is in beautiful condition, and he even remarks that it's in a very good state of repair for the market. All you have to do is figure out what the price per sq ft comes out to, and it's obvious that the assessment is off by a good margin.

It's almost certain the seller will refuse to this large a drop in price, particularly when it's clearly off from what the market would pay. He should agree to a drop due to the sq footage being off, but we're probably going to need to appeal this appraisal to get to a price he'll agree to, so I'd sure love any suggestions on how best to approach the appraiser to get him to adjust it. I know my realtor has other comparables that are closer to my house both in size and price but slightly further away, but I know it's hard to get an appraiser to change their mind so I sure would love suggestions. I won't be able to try to purchase again until I save up the $2K I've lost to get this far, so I am devastated that this appraiser may have killed this sale, it took me 3 months to find the right house, and now it's all falling apart because of this.

why would u say the price was excellent, excellent for who? if the market is fair, why would an "excellent price surface? wouldn't another buyer be willing to pay more if it was so excellent? maybe excellent is based on your perception and non an unbiased opinion. If this price is excellent, are there back up offers ready to take your place? how many days on market....explain your agent's track record...is it based on all deals, or just the one's she is willing to discuss with you as winners.

tax value has nothing to do with this so if it's a little or a lot high.....inconsequential

appraisers don't kill deals, they inform the bank of their opinion what a house is worth, the bank can do anything they want with that opinion...if u think it's worth more, there is nothing stopping u from paying more or buying the house.

good luck

 

[Walter Kirk]

George Hatch explained the situation better than I could. I question the appraisers methodology. I'd be willing to bet that the lender who ordered the appraisal relied upon an AMC which hired a low bid appraiser. The low bid appraiser followed AMC and lender guidelines which resulted in an unreliable appraisal.

I suggest that you contact your lender and demand a proper appraisal from an experienced local appraiser.Should your lender refuse I suggest that you contact a local lender, not a large national lender,who knows the local market and cares about quality.

 

[maryjo313]

To answer some of your comments

1. No, the appraiser did not have any issues with the property not being as nice as the others. He commented on how well it was maintained; it looks almost new inside, and when I met the neighbors, they even commented on how immaculate the owners keep it. If anything, the value should have been bumped up for it being in much better condition than the average home in that neighborhood. Certainly better than a short sale home.

2. Again, the issue with the larger house that he included as a comp is that it's a short sale. So of course if you use that to average out the values it's going to lower them significantly. But the appraiser even noted in his report that short sales and BOPs are not effecting the market. Why then does it make sense to include it?? His only reasoning for including it was that it was close. That listing alone accounts for a good chunk of the lower price. So no, I don't agree that the price of the home should fall somewhere between one of the smaller ones and this one, when as a short sale, it's price (and typically condition as well) is well below what a normal home value would be.

3. Whatever the reasoning is for giving so little value to the living space, it has resulted in this appraisal coming out WAY below the market. If the point of how these figures are determined is to come up with an assessment that matches what the home's market value is, it's missing the mark. Heck, just look at the comp he includes from the neighborhood that's a normal sale. He's valuing my 2500 sq ft 4 BR home at only $3K more than the nearby 2178 sq ft 3 BR home sold for. That does not seem off to you???

I'm about as informed a buyer as they come. I did all my own home searches for 3 months, all through the local area, it was very rare that my realtor found a listing that I had not found myself. I quite simply did not see a SINGLE 4 BR home of this size under $200K, other than the occasional short sale, and even most of those were priced higher than this. The appraised value is where typical smaller 3 BR homes are selling for (and 2 of the 4 comps he used were 3 BR homes).

I've not gotten word yet how the seller has responded from this, but I don't see how they can possibly agree to go so much lower when the market clearly is paying more for this size home right now. It's really not even that close a call. Yes, I would expect to pay lower due to the size discrepancy (which does appear to be correct, it was a clear mistake in the sketch of the house that he noticed) but only about $10K, maybe $15K less, while the appraisal is a whopping $30K below the sales price. It's just ironic that after looking at so many similar houses priced HIGHER than this one in the same size range, and being so thrilled that the seller accepted what we felt was a pretty low offer, that we'd actually have the appraisal come out this badly.

 

[maryjo313]

YOu might consult with a local appraiser and have them review the original report. Now, the only people that pay attention to $/sq. ft. are agents and buyers/sellers and of course those silly TV shows on HGTV! APPRAISERS DO NOT PLAY WITH THOSE SILLY GUIDELINES.

Hhm, that sounds like a good idea to just have someone else review it and maybe look at what comps were available.

And yes, I know appraisers don't actually use the price per sq ft, it's just the only thing I have to quickly compare what my house came out as compared to the others, if you don't know the market out here and prices typical for this size home. Whether you go by that price per sq ft or the appraised price, it's simply not a sales price you'd see on a home of this size out here, unless it's a short sale or foreclosure. So I'm just trying to understand what went wrong that he came up with it.

 

[Tim The Enchanter]

In comp selection I'm looking for sales that are close in proximity, as similar to the subject as possible in all important characteristics, and as recent as possible.

Real estate is location location, but the property characteristics is a close second. Ideally you have comps very close by that are model match homes that sold last week. In practice the time parameter is first to be expanded when ideal comps don't exist.

Short sales MAY not meet the definition of market value, as the seller may not be typically motivated, and marketing may not be typical. Example, an underwater seller that doesn't care what the price is because they will not get anything anyway, and an agent that does not really market the property well. Things can sell for less than they would if it were a typical non distress sale. In that case I'd say it's not really a good comp, even if it was a model match next door sold yesterday.

Just as $/SF doesn't mean much to the appraisal, averaging is also not part of the process. You would not or should not anyway, take 2 good comps and a short sale and compute the average. If that's all I had I'd probably put in the short sale, but explain it shows the very low end, and gets little weight. If they were all similar and had prices of $210, $200, and $185 as a short, $200 - $210 would make sense.

Hope this helps with the comp selection question. I can tell you George Hatch is a long time member here, and has shown himself to be a smart guy that really knows his stuff.

 

[Terrel L. Shields]

he only bumped the adjusted price up only about $24/sq

Well... of course, if he verified the SF adjustment was higher, say $45 or 50/SF, then his guidelines would be over 10% and he'd have to explain explain explain...use a low enough SF adjustment that explanation goes away and you can use any comp within the preconcieved targeted price range

Now, the only people that pay attention to $/sq. ft. are agents and buyers/sellers and of course those silly TV shows on HGTV! APPRAISERS DO NOT PLAY WITH THOSE SILLY GUIDELINES.

implies the "market" watches those guidelines but appraisers don't ??

Seems you have a classic "suspect" appraisal and yep, I bet it originated from an AMC...