When someone is talking about a comp in real estate, they are typically referring to a recent sale or listing of a property that is similar to the property being considered for sale or appraisal. This can be used as a point of reference to help determine the fair market value of the subject property.
Finding comparables can be challenging for appraisers in a number of situations.
Some of these include:
Unique properties: Properties with unique features, such as historic homes or homes with unusual architecture or design elements, can be difficult to find comparables for, as there may be few or no similar properties in the area.
Rapidly changing markets: In markets where property values are rapidly increasing or decreasing, it can be difficult to find recent comparable sales that accurately reflect the current market conditions.
Limited inventory: In areas with low inventory, it can be difficult to find recent comparable sales, as there may simply not be enough properties that have sold recently to provide a good basis for comparison.
Lack of data: In some areas, there may be limited data available on recent comparable sales, which can make it difficult for appraisers to find reliable information to use in their valuations.
Non-arm’s length transactions: Transactions that take place between family members, business associates, or other non-arm’s length parties may not reflect fair market value.
Distance: Sometimes, it can be difficult to find comparable properties that are close enough to the subject property to provide an accurate valuation. In rural areas, for example, there may be few nearby properties that have sold recently.
In these situations, appraisers may need to use their professional judgment and experience to make adjustments to the comparable properties they do find, or to expand their search to different areas or property types in order to find reliable comparables.
There are a few strategies that real estate professionals may use to find comparable properties, even when there are unique features involved.
When appraising more complex properties, appraisers need to be especially careful and diligent in selecting comparable sales. Some unique features could be based on location and site, such as waterfront or acreage properties. Other unique features are physical features like the style of a home (log homes), large square footage (“mansions”), or indoor full sized sport courts. Here are some ways to find good comparables:
Add filters when searching the Multiple Listing Service (MLS): The MLS is dynamic and search fields can be added or removed as needed. When a comp has a unique feature that needs to be accounted for, it’s important the feature is included in the search.
Expand the geographic area: If there are limited similar properties available in the subject property’s immediate neighborhood, appraisers can expand the search area to nearby neighborhoods or even other cities to find comparable properties that have the same features.
Look for similar neighborhoods: Even if a property has unique features, it may be located in a neighborhood with similar properties. For example, a unique property in a historic district may be comparable to other historic homes in the same area, even if the features of the homes are not exactly the same.
Make adjustments: When finding comparables for properties with unique features, it’s often necessary to make more adjustments to the sale prices of the comparable properties. Appraisers can adjust the sale prices of the comparable properties to account for the unique features of the subject property.
Use different types of comparables: Real estate professionals can also expand their search to include different types of properties, such as commercial properties or properties in different neighborhoods. This can help to find properties that have unique features, even if they are not exactly the same as the subject property.
By using these strategies, real estate professionals can find comparables for properties with unique features, even if it takes some extra effort and creativity to do so. It’s important to remember that finding comparables for unique properties can be a challenging process, but it is essential for accurate appraisals and valuations.
When market conditions are rapidly changing, finding accurate and relevant comps can be challenging.
To find comparables when market conditions are rapidly changing, appraisers may need to take the following steps:
Use current and reliable data sources: Appraisers need to use current and reliable data sources to get accurate information on recent sales in the area. This could include multiple listing services, property tax records, or other real estate data sources.
Look for sales within a narrow timeframe: When market conditions are changing rapidly, sales that occurred more than a few months ago may not be relevant. Appraisers may need to focus on sales that have occurred within the past few weeks or months to get a more accurate picture of current market conditions.
Adjust for changes in the market: Appraisers may need to make adjustments to the comparable sales to account for changes in the market. For example, if the market is experiencing a rapid increase in prices, the appraiser may need to make upward adjustments to the comparable sales to account for the increase.
Consider other factors: In addition to finding comparable sales, appraisers may also need to consider other factors that can affect the value of the property, such as supply and demand, interest rates, and economic conditions.
Use professional judgment: Appraisers need to use their professional judgment and experience to determine the most appropriate comparables to use in the appraisal. This may involve looking beyond traditional data sources and considering other factors that may affect the value of the property.
In short, finding accurate and relevant comparables when market conditions are rapidly changing requires a combination of up-to-date data, knowledge of the local market, and professional judgment.
When there is limited data on recent comparable properties, appraisers may need to take additional steps to determine an accurate value for the subject property.
The MLS is a great tool to find comps. However if a listing appears to be missing crucial information or gives conflicting information, more research is required. Appraisers look for data from other sources, such as tax records, building permits, or other public records, to find information about recently sold properties that may not be listed on the MLS. This is information that is usually always checked but becomes critical when the MLS data is uncertain.
If after all the normal research results in limited data, it may be time to find other comparables. The search can be expanded these ways:
Use older comparables: If there are no recent sales of comparable properties with good data, appraisers may need to use older sales data and adjust for market conditions and trends that have occurred since the sales of those properties.
Use different types of comparables: Appraisers may need to use different types of properties as comparables, such as properties with similar features or in similar locations, but with different property types (e.g. a detached condo instead of a single-family home).
In any case, when there is limited data available, appraisers must exercise professional judgment and use the best available data to determine an accurate value for the subject property. If there is limited data available for a comparable, it may not be a good comparable. They may also need to clearly explain the limitations of the data used and the methods used to determine the value in their appraisal report.
When inventory is limited, appraisers may need to use creative strategies to find comparables.
Here are some ways that appraisers might go about finding comparables when inventory is tight:
Expand the search area: If there are no recent comparable sales in the immediate area, appraisers may need to expand their search to nearby areas or even neighboring towns to find properties that are similar in size, style, and features. This may involve looking at properties in adjacent neighborhoods or even properties in other towns or cities.
Use older sales: If there are few recent sales, appraisers may need to use older sales as comparables. In this case, the appraiser will need to adjust the sales prices to account for changes in the real estate market since the sale occurred. This may involve adjusting for changes in home values, interest rates, and other market factors.
Use pending sales: If there are no recent closed sales, appraisers may be able to use pending sales as comparables. Pending sales are properties that are under contract but have not yet closed, and they can be a good indicator of current market trends. However, appraisers will need to be cautious when using pending sales, as they are not yet finalized and may fall through.
By using these strategies, appraisers can find comparable properties even when inventory is limited. However, it’s important to note that finding reliable comparables is an essential part of the appraisal process, and appraisers must use their professional judgment and experience to ensure that the comparables they choose are as accurate as possible.
In a non-arm’s length transaction, where the buyer and seller have a pre-existing relationship or where one party has a controlling interest in the other.
Use arm’s length transactions where possible: When choosing comparables, appraisers should prioritize using sales that were made at arm’s length, where the buyer and seller are not related or have no other pre-existing relationship. Arm’s length sales are generally considered more reliable and indicative of the true market value.
Look for similar properties: Appraisers should look for properties that are similar in size, condition, location, and other characteristics to the subject property. This can help ensure that the comparables are truly comparable to the subject property and can be used to make accurate adjustments.
Document the type of sale: Appraisers should clearly document the type of sale. For non-arm’s length transactions, this should include how the buyer and seller know each other.
In any case, appraisers must exercise professional judgment and adhere to the Uniform Standards of Professional Appraisal Practice (USPAP) when selecting comparables in non-arm’s length transactions. They must ensure that their appraisal report is accurate, complete, and reliable, and that it reflects the true market value of the subject property.
When there are no comparable properties that are close enough in proximity to the subject property to provide an accurate valuation.
There are a few strategies you can use to arrive at a reliable estimate of the property’s value:
Look for similar properties in nearby areas: If there are no comparable properties in the immediate vicinity of the subject property, try expanding your search to nearby areas that have similar characteristics. Look for neighborhoods with comparable housing stock, demographics, schools, amenities, and other factors that may affect the property’s value.
Consider different valuation methods: Instead of relying solely on the sales comparison approach, which involves comparing the subject property to similar properties that have recently sold, you can also consider other valuation methods such as the income approach or the cost approach. The income approach is based on the potential income the property could generate, while the cost approach estimates the cost of rebuilding the property from scratch.
Adjust for differences: If you can’t find truly comparable properties, you may need to adjust the sale prices of similar properties to reflect differences in location, size, age, features, and other factors. You can use data on recent sales to determine how much certain features or characteristics add or subtract from a property’s value and then adjust the sale prices of the similar properties accordingly.
If you don’t agree with the comparables that the appraiser used
Whoever orders the appraisal (oftentimes this is your lender) can ask the appraiser to explain why those particular properties were selected and what adjustments were made to account for any differences between those properties and your property. The appraiser may be able to provide you with additional information and analysis to help you understand why those comparables were chosen.
If, after speaking with the appraiser, you still disagree with the comparables that were used, you may be able to provide the appraiser with additional information or suggest other comparable properties that you believe would be more appropriate. However, it’s important to keep in mind that the appraiser must follow certain professional standards and guidelines when selecting comparables, and may not be able to use all of the properties that you suggest.
Ultimately, if you are still not satisfied with the appraiser’s selection of comparables, you may need to seek a second opinion from another appraiser. It’s important to remember that appraisals are not always an exact science, and different appraisers may have different opinions on the value of a property based on the comparables they select and the methods they use.