Posted by Apex Home Loans ● December 3, 2020
Appraisers Can't Use These Comparable Sales
Hot markets foster appraisal issues – every time.
This is because aggressive buyers in multiple bid situations frequently offer to pay far more for a property than what closed comparable sales can support in an appraisal. If buyers have ample cash, low appraisals are often not an issue, as buyers can simply bring in cash to cover shortfalls. If cash is tight, however, a low appraisal can kill a deal.
We obviously want appraisals to support the contract price as much as anyone. This is because we want to support our clients and because we don’t get paid a penny unless the transaction closes (just like our agent partners). In addition, we have far more time and money invested in every transaction than most people realize, so we fight very aggressively to ensure every transaction closes.
Our appraisers make every effort to obtain the value in support of the purchase price while still complying with appraisal guidelines. In a multiple bid situation with prices escalating well beyond the asking price, it’s possible an appraisal can come in under the sales price. When that happens, we of course work with all parties to rebut the conclusion and try to increase the value where feasible. One of the first things we do is request comparable sales from both selling and listing agents. And more often than not, we are given comparable sales that we are unable to use because they are so far outside of appraisal guidelines. Or worse – we are often given comparable sales that support a lower value because of the adjustments that are required for larger dwelling size, larger lot size, better view, less traffic, etc.
This is especially a problem for smaller properties in the DMV (DE, MD, VA) (1,200 to 1,600 square feet) that sell in the higher price ranges. Agents often send us comparable sales that are in the 2,000 to 4,000 square foot range that appraisers cannot use because the properties are not actually “comparable,” given their far larger size.
All this is to say that we and our appraisers will do everything we can to support a contract price, but our hands are tied by hard and fast appraisal guidelines that every lender must abide by. We all need to keep these guidelines in mind when sharing or suggesting comparable sales.
Basic Guidelines for Comparable Sales
- Closed Date
Comparable sales must have closed prior to the inspection date of an appraisal. Appraisers cannot use comps that close after the inspection date. The strongest indicators of current value are those comps which have closed within the past 90 days. Pending sales and listings are only used on the appraisal report to show what the current market is doing; appraisers do not consider these comps in their final opinion of value. If you know of better comps getting ready to settle it may be best to allow for a longer appraisal contingency and arrange for an appraisal inspection to occur AFTER these other sales have settled. Once the appraiser does their inspection, homes that sell even a day or week later cannot be use as comps.
Comps should ideally be within 20% of the size of the subject property (unless no other comps are available). For example, appraisers usually cannot use a 1,300 sq ft comp for a 1,000 sq ft subject property. Likewise, appraisers cannot use a 700 sq ft comp for a 1,000 sq ft property. Appraisers also cannot simply employ a “price per square foot analysis” like some agents and homeowners often do; appraisers are required to correlate to similar sized homes.
Comps should ideally be within one mile of the subject property, and not over any major barriers like a freeway, a river or railroad tracks.
- Same Town/City
Comps need to be in the same city as the subject property in most cases, even if a comp in another city is less than a block from the subject property.
- Lot Size
The appraiser must also consider the lot size and lot utility in the valuation. If the subject and all comps have flat usable lots, the appraiser will adjust for large variances in lot size. In areas where lots are sloped, appraisers will estimate a lot’s usable area or “utility” and adjust accordingly. The important thing to remember is that a 40,000 square foot sloped lot will often not have any more value than a 10,000 square foot flat lot.
- Adverse Influences
If the subject is on a busy street or abuts a school, freeway, railroad, industrial area, cemetery, etc., the appraiser must include at least one comparable in the report with a similar location influence. This is necessary to determine if an adjustment is required for the adverse influence.
- Bracketing Comps
Valid comps need to “bracket” the appraised value. Hence, at least one comp needs to be priced higher than the appraised value, and one should be priced lower. Additionally, the appraiser must “bracket” each amenity of the home with the comps. For example, the appraiser must include homes that are larger and smaller than the subject to “bracket” the size of the home.
- Condo Comps
The appraiser should ideally include comps from inside and outside of the complex. If either are missing, underwriters often call for appraisal reviews.
If the subject enjoys an unobstructed view of an ocean or a lake, for example, the appraiser must show the value of that view by using some comparables with a similar view and some with no view. Appraisers generally should not use “view comps” to support the value of a property with no view. This is also a good example of why appraisers do not use the “price per square foot” analysis. If two homes are identical and one has an ocean-view and the other does not, the one with the view will skew the analysis.
Topics: Home Appraisal