When is a Comparable…Comparable?

By Heather Anglin, Vendor Relations/Appraisal Coordinator

A Comparable, sometimes referred to as a “comp,” is, by definition, a property used for comparison in the real estate appraisal process. The property is found to have similar characteristics to the Subject property whose value is being sought.

Why is it important that your Comparables are actually comparable? Evaluating properties of similar characteristics and amenities enables the parties involved in the appraisal process to know that the estimated value placed on the Subject property has been given a fair market value. This may also help to lower the risk of overpaying for a property.

Before we dive in, here are a few important definitions to understand.

Market area – The designated area where the Subject property is located. This could be determined by a school district, bordering main highways, or a city limit.

Amenities – Additional improvements of the Subject property or market area. This could be a barn, neighborhood swimming pool, acreage, etc. In high rise Condos, it could be the floor location. For Multi-family homes, it could be the number of units.

Adjustments – Dollar amounts given to, or taken from, the Comparables in an effort to reduce the gap between the Subject and Comparable on any front.

Model Match – A Comparable that is identical to the Subject. In some cases, the Model match may have slight differences like a deck instead of a patio, or a two car versus a three car garage due to the upgrades the buyer chooses. This typically requires zero to minimal adjustments.

Bracket/Bracketing – Finding Comparables that are smaller, similar, and larger in the aspect of the adjustment you are making. For example, in order to bracket the Gross Living Area, you want three Comparables; one each with less GLA, the same/similar GLA, and more GLA.

When a Subject is being appraised, the process includes evaluating the recent sales of properties in the surrounding market area and determining which are deemed to be most comparable. To deem a recent sale “comparable,” the appraiser must look at its location in relation to the Subject property. The appraiser must review like amenities (pools, decks, detached buildings, barns, acreage, etc.), like GLA, and like room counts, among others.

While a Comparable is being reviewed, there is a mental checklist the appraiser is going over when comparing it to the Subject. Does the comp have the same bedroom/bathroom count? What is the difference in regards to the acreage? How large/small is the square footage/GLA in comparison? Does the comp have a finished basement?

Ideally, a Model match is what the appraiser is hoping for. In a subdivision of comparable homes and lots of sales activity, these are more likely to be found. If the appraiser cannot find a Model match, a Comparable that’s as similar as possible to the Subject is the next best option. This will be a property with the same bed/bath count, style, foundation, and quality of construction. Of course, it is not possible to have exact matches in all appraisals. The location of the property and/or uniqueness of the Subject can make finding matches more difficult.

Upon review and collecting the data on the Comparable, the appraiser will start to grid the Comparables and compare them to the Subject. This is the step in which adjustments start to appear. In reality, although the report may only show three or four comps, the appraiser may have had to grid five to seven (or more) Comparables to get the best ones. After the Comparables are placed into the grid, the appraiser starts to input adjustments to bring the properties together. They may include a GLA adjustment; adjustments are not made for differences of 100 square feet or fewer as an industry standard, but there are always exceptions to this. They may also include a bathroom count adjustment, a basement adjustment, and other main amenities adjustments. To an extent, the more adjustments that are necessary to bring the Comparables similar to the Subject property, the less they are “comparable.”

The appraiser is looking to bracket the most amenities as possible. This could require adding a Comparable simply to have one that is larger in acreage with very little similarities in any other area. The more amenities you can bracket, the easier it is to ensure you have the most accurate estimated value for the Subject property. Comparables with adjustments show how the market values different amenities. For example, two Comparables with an inground pool and two Comparables without an inground pool (adjusted in the other aspects) may show a value difference of $5000. This indicates that buyers in the market area deem the addition of an inground pool to improve the value of the home by $5000.

Whether it is a Comparable Sale, Listing or Rental, appraisers employ the same general guidelines when choosing comparables. They are looking for those Comparables that require the least number of adjustments, were recently sold, and are located within the Subject property’s market area. This is not always going to be easy, and can’t always be wrapped up in three Comparables. What appraisal report readers want to look for is if the Comparables are like the Subject, if amenities are bracketed, and whether or not adjustments are made in the correct direction.

Do these guidelines work on every property? No. The appraisal world has never been a black and white industry, and most likely never will be. However, appraisers can work to find the Comparables best suited to make the lightest shade of grey!