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How Appraisers Determine Value
A favorite pastime of many homeowners is to monitor their home’s value on Zillow, Trulia and other online real estate websites. Although these websites can give us a good idea of what our home is worth, ultimately an appraiser’s selection of comparable sales (A.K.A “the comps”) will determine what the value is in the eyes of a lender. The concept of comps and exactly how and when an appraiser uses them can be confusing.
What is a comp?
When valuing a home, an appraiser collects data on the sales price of similar homes to help develop a credible opinion of value. Generally speaking, comps that have sold most recently and are most similar in location and physical characteristics to the subject property are selected for further analysis. It’s important to note that active listings or pending sales may not be primary indicators of value or considered as comps. That’s because homeowners are free to ask for as much money as they’d like when putting their home on the market. Most lenders require appraisers to utilize at least three closed sales as comps.
Timing, Timing, Timing
Appraisers try to use comps that sold within the prior six months. However, there is no simple formula an appraiser can apply, and in some cases, appropriate comps for a particular home don’t exist within that timeframe. In such scenarios, an appraiser must go back even further to find applicable data. However, appraisers work hard to find the most recent data possible when delivering an opinion of value.
Location, Location, Location
In addition to finding comps that are physically similar in size, condition, and features to the home they are appraising, appraisers must also identify comps with a similar location. However, simply using a home that sold within the same county, town, or even street will not necessarily suffice. For instance, a home with an ocean or mountain view is clearly more valuable than a similar home on the same street with no such view.
Property type matters
When appraisers are developing an opinion of the value of a unit in a condominium, they attempt to use comps from the same project and similar competing projects. That’s because projects that have different amenities may not be considered to be similar. For example, a unit in a smaller project with very few amenities wouldn’t be similar to a unit in a larger project that might include a fitness center, roof decks, pools, parking garages, storage units, freight elevators and passenger elevators.
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