We get this question a lot, from almost everyone we work with. "Comps" refers to "sales comparables," which are sales used in the report to compare the subject to; and in the sales comparison approach, the main indicator of value. Sometimes it can be frustrating for a homeowner or realtor to not understand why we skipped over some comps, and chose others instead. Although every case is different and may require more creative comp selection, here are the three main guidelines we stick to when choosing sales comparables:
- Recent
Since the market is constantly shifting, we try to stay as recent as possible with our sales comparables. If sales are available, we try to stay within 90 days of the effective date of the appraisal, and if that's not possible, we try to stay within 6 months. This is important because even if the market has been relatively stable, there are factors such as seasons, current social/economic climate, and interest rates that change constantly and can only be reflected in the most recent sales. - Proximate
How close are the comps to the subject? If there are comps available within the same development, we will almost always use those. Sometimes there are no comps within the development, and then we try to stay very close, within a mile at least. This helps ensure similarity in factors like traffic, schools, neighborhood desirability, and of course, location, location, location. Proximity is very important and if there are close comps available, we rarely have a reason to jump over those and use comps farther away. However, there are times when a neighborhood can be a "pocket," a great area in the middle of areas that are maybe not comparable at all. In times like this, similar neighborhoods must be found while other neighborhoods are skipped over. - Similar
Similarity is, of course, extremely important in choosing sales comparables. If the subject is a recently updated home with a solar pool, we will not use the REO sale down the street that was totally trashed before it sold. If the subject has the smallest lot in the neighborhood, this is taken into consideration. If the subject has 2 bathrooms and all other homes in the neighborhood have 1, then we will go outside the neighborhood to find at least one comp with similar bathroom count. Sometimes similarity forces us to go further back in time, or further out in distance, to find at least one comp that is in similar condition, similar sales terms (no short or REO), similar size, etc.
The main principle when appraisers choose comps is to compare apples to apples! When we are looking at comps, we are constantly asking ourselves, "Would a buyer want to buy THIS house if he/she could also buy THAT house? Would it be a tough choice?" If one house is clearly superior, we know it is not a good comp.
Have you ever had an experience with badly chosen comps? Let us know in the comments!
