What is a Comparable?

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What is a ComparableMost major mortgage lenders require at least three comparable properties to be included in every appraisal report. However, the appraiser analyzes all sales in the neighborhood in order to develop market trends, even if they choose not to use them in the appraisal report. But that leaves us asking why? Why were some sales ruled out and why were others used as comps in the report? You will find your answer to these whys once you understand some of the methodologies behind an appraisal report.

The methodology of an appraisal report

Comps are based on sold properties in the surrounding area that are the most similar overall to the home being appraised. Here are some factors appraiser’s consider in looking at Comps when trying to create an appraisal report:

Proximity: When looking for a comp in the surrounding area of the property being appraised the rule of thumb is the closer, the better. Distance from the subject property is important. Obviously, this is more of a challenge in rural areas, but the appraiser will work with what is available. In the majority of cases, an appraiser will be able to find suitable comps within a few miles.

Quality and Condition: A strong roof, a finished basement, a solid foundation … these are valued in a home. Finding a comp with similar conditions in these areas will help indicate a quality comp.

Architecture style: A Bungalow best compares with other bungalows. A colonial best compares with other colonials, and so on it goes. It’s easiest to compare the values of homes that are the same style, because they often share overall features. It also allows an appraiser to dive into more detail in the comp, because it’s easier to compare features. This will also create a better reflection of the market.

Land and Home Size: Along with proximity and architecture style, the amount of land is considered as well as the overall size of the home.

Age: The age of a structure will aid in the comp selection process. Homes built in nearly the same time-frame tend to have very similar features, code issues and maintenance needs.

Additional Features: The homes amenities are also considered and are matched to the final comps. Some examples are. Patios/Decks, Fireplaces, In ground Pools, finished basements and the list goes on.

Are homes currently up for sale used as comps?

New property listings are not considered to be comparable properties, because they are not final and closed transactions. Property listings are analyzed closely for market trends however, the final decision is based on homes that actually sold.

When the transaction of a property did not take place in an open market, that property can also be halted from becoming a comp contender. Another rule of thumb: Only comps that were transacted in an open market can be considered. There may not be enough information about the sale to develop market trends and a sale performed outside the open market can be manipulated and may not reflect a true market price. For instance, family members could sell a home within the family, choosing an agreed upon value that may not be the true market value.

What do you think of comps in appraisal reports? Let us know right Below!

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