Quick answer: Comps should generally be within one mile of the subject property, and not across major barriers like a freeway, river, or railroad tracks. They also need to be in the same city as the subject in most cases, even if a closer comp sits just over the city line. Distance is not the only rule: comps should be within about 20% of the subject’s square footage and should have closed recently. When strong nearby comps exist, appraisers are required to use them and cannot reach farther out for more favorable sales.
Hot housing markets tend to foster appraisal issues due to buyers trying to be as aggressive as possible with their offers, where they oftentimes are offering well over market value for a home. Because this happens so often, we compiled a list of guidelines for comparable sales appraisers can and can’t use to help you find comps that will help support a home’s value.
When property appraisals come in low, Realtors often send our Appraisal Manager comparable sales (called “comps”) for us to use as evidence to rebut the appraisal and have appraised value increase.
The problem is that we often cannot use the comps that Realtors send us because they are so far outside of standard appraisal guidelines.
This happened recently when an agent sent us comps that were all at least 30% larger than the subject property.
We also had an issue when an agent wanted to use comps on quiet cul-de-sacs to support the value of a subject property that was on a busy through-street.
Basic Guidelines for Comparable Sales
A comparable property is a recently sold home similar to the subject in size, location, age, condition, and features, ideally within one mile, in the same city, and within about 20% of the subject’s square footage.
- Size
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 sf comp for a 1,000 sf subject property. Likewise, appraisers cannot use a 700 sf comp for a 1,000 sf 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.
- Distance
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. Fannie Mae does not set a maximum distance for comparable sales, though. Appraisers may use more distant comps when those are the best available indicators of value, as long as they explain why they were selected. This is why rural properties often rely on comps from greater distances: nearby comparable sales are simply scarce, so a wider search is expected. The “within one mile” figure many buyers hear is a common suburban and urban convention, not a hard rule.
- 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.
- Closed Date
The strongest indicators of current value are those comps that have closed within the past 90 days.
- Pending Sales and Listings
Appraisers use pending sales and active listings only to show what the current market is doing; they do not consider these as comps in their final opinion of value.
- 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. Appraisers typically use at least three closed comps, and at least one needs to be priced higher than the appraised value and one 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.
- View
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.
- Comps Must Close Before the Appraisal Inspection
Comparable sales must have closed prior to the inspection date of an appraisal. Appraisers cannot use comps that close after the inspection date.
Frequently Asked Questions
What makes a property comparable?
A comparable property is a recently sold home similar to the subject in size, location, age, condition, and features. Appraisers look for comps within about one mile, in the same city, and within roughly 20% of the subject’s square footage.
How far away can a comp be?
Comps are generally within one mile of the subject and not across major barriers like a freeway, river, or railroad. Fannie Mae sets no maximum distance, so appraisers may use more distant comps when they are the best available, which is common for rural properties.
How recent do comps need to be?
The strongest comps have closed within the past 90 days, since recent sales best reflect current market value. Comps must also have closed before the appraisal inspection date.
Can appraisers use pending sales?
No. Appraisers use pending sales and active listings only to illustrate current market trends. They are not counted as comps in the final opinion of value.
How many comps does an appraiser need?
Appraisers typically use at least three closed comparable sales, and often more. The comps should also bracket the subject, including sales priced both above and below the appraised value.
Have questions about appraisals? We’re happy to help – contact us here anytime.
