What is a comparable sale?

 

You have been working with your buyer now for five months. They have written six offers and have lost out on each in a bidding war. A new house comes on the market which meets their needs, and frankly, they are tired of making offers and losing out on the deal. This time they decide to come in with an offer substantially above asking price in order to beat out the myriad other offers they expect are coming. The strategy works and they win the deal. Trouble is, they still have to obtain financing. The offer does include a three percent concession for closing costs, which the seller was happy to agree to considering they accepted an offer that was twelve percent higher than asking price. They were particularly happy as the only other offer they received was slightly less than asking. This happens. The seller’s agent is not under any obligation to say how many offers were received nor what the offer prices were. The weary buyer offered in good faith to secure the property. They simply did not want to lose out on yet another property.

 

Along comes the appraiser for the buyer’s mortgage lender. The appraiser studies the market, notices that the market has started to cool, and that instead of houses receiving ten or more offers at a time, now they are receiving only one or two, if any. Houses are starting to remain on the market a bit longer than they were. The sales the appraiser analyzes are good comparable properties, but they all sold slightly lower than the asking price for the property, and 12-14% lower than the agreed upon sales price. After analyzing the market and the sales, the appraised value falls short of the sales price by 12%, in line with the asking price. The question is, do you try to renegotiate the contract immediately, or do you take the route of requesting a reconsideration of value claiming the appraisal was inaccurate and submit several sales that you say are better than those included in the report?

 

How are they better?  Is it just that they sold higher than any of the sales the appraiser used, or are they actually comparable properties? Are they already addressed in the appraisal report? Sometimes there is a narrative section which addresses sales that were considered and were not included in the comparable sales grid for one reason or another. If you have the opportunity, read the appraisal report in its entirety first, as you may find the report had a compelling discussion related to why the sales included were the best available and how the value was arrived at.

 

A comparable property is one that is a substitute for another property. It is uncommon to have properties that are directly comparable since every house has something unique about it. A car analogy might help you in choosing comparable properties for your market analysis, or to provide appraisers on your sales when you meet them at the property (and no, we do not mind having sales offered as long as there is no expectation that we are going to use them, just consider them).

 

Most people will want to buy as much as they can for as little as possible. If you have a budget for a new car of $25,000, it is unlikely you would be out looking at BMW’s or Mercedes, whereas if you have a budget of $60,000 and want a German car, you are unlikely to be looking at VW Bugs. Is the VW Bug comparable with a BMW 5-Series? Not likely. Are they both German Cars? Of course. Would the buyer of a VW Bug choose a BMW 5-Series if they were the same price? Most likely. Would the buyer of the BMW 5-Series buy the VW Bug if they were the same price? Highly unlikely. You get the picture.

 

This is the same idea with comparable properties. While a buyer of a good basic 1,500 square foot tract house would likely jump at the chance to buy a 2,500 square foot semi-custom house if they were the same price, in equal locations, the converse would not be the case. The reason for these basic terms is that we have all seen agents provide appraisers “comparable” properties that are anything but. To be comparable, the likely buyers of one would have to consider the other, so it is not only that the buyer for the subject will consider a far superior property, but the buyer of that far superior property would want to be reasonably considering the subject.

 

What does this mean when you provide sales to an appraiser? First, look for what the typical buyer for your property would truly look at as a substitution. When you do that, look at those sales in the same vein, as whether your property would be a reasonable substitution. Sometimes there is nothing even approaching comparable to your property. In this instance, look to what else has sold that has some element of comparison, such as location, or quality and size, and then try to find something that is obviously not as good as your property as well as something that is better. In that manner, at least you will know that the property should be worth more than something and less than something. Appraisers will do this on those unique circumstances when there is truly no comparable property to chose from.

 

This bit of wisdom will help you choose the comparable properties for your market analysis, and give you a good basis of comparable properties for the appraiser should you wish to share them.

 

 

 

2 thoughts on “What is a comparable sale?

  1. Great information here about how appraisers select comparable sales. Thanks!

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