Most of the appraisals we have completed are in the Greater Sacramento Area (this includes Placer, El Dorado and Yolo Counties), While it's OK to do work in other areas, there is one caveat, the appraiser must be geographically competent. This means doing whatever is necessary to learn the market area. Conversations with Realtors, a thorough analysis of MLS sales and knowing which areas are the most desirable or least desirable are just a few ways of becoming geographically competent. The Sacramento Area has many 'submarkets'. One example is an area called the Fab Forties in East Sacramento: someone from out of town may not know that this is a market unto itself and to obtain true comparable sales, the appraiser must stay in the well defined area. Click here for more on selecting sales comparables.
How can knowing the area well and doing many appraisals in the area make a difference? Well, this week we did an appraisal for a large, custom built home that was built using top quality materials, has been impeccably maintained, and is located on a gated street of only 4 similar homes. It is located in Fair Oaks, which is an area of middle- to high-end homes and it is a multi-million dollar home. There were no sales on that street within the past several years, and although there are homes of similar quality and size in the area, there were no recent sales within a couple miles. Because of this, comparable sales were hard to find. The owner shared with us that he had had an appraisal done a couple years ago, and in the appraisal, comps had been used from the area right around the home-- they were nice homes and recent sales, but they were not located on a secluded private street, they were not estate-style homes on an acre or more, and they were not custom built of the highest quality. Because of this, the appraisal came in at about half the value of the prior two appraisals on the home and the prior purchase.
It's understandable that this happened. Sometimes you're doing an appraisal and there are just no comps, so you think, well, I'll have to use what I can. This appraiser probably had no idea there were more similar homes available. The way we dealt with this was by selecting sales comparables that are similar in quality, size, and condition. They were located further away than the immediate area, but they were the only true comparable sales available. There are several streets that are very similar to the one the subject is on with similar custom homes, but they are not in Fair Oaks-- they are in the neighboring cities of Carmichael and Sacramento. While proximity is important, it is not always the most important. When you are appraising a home with a much smaller market segment of buyers, such as the kind of buyers who are looking to spend $1 million plus on a custom home, the market area from which to choose sales comparables gets bigger. If we were not very familiar with the area as a Sacramento appraiser, we would have been less likely to find the "perfect" sales comps for the home.
Fannie Mae and Freddie Mac have guidelines, and if they made sense and produce a credible report (this is for lending work) then by all means, follow the guidelines. However for complex properties, staying within 1 mile and 6 months back in time may render a completely unreliable valuation.
An appraiser's main task is to produce a supportable, credible report using actual comparable sales.
Any thoughts or questions are welcome!
