How To Choose Comparables
The careful selection of comparables is very important to arrive at the right value. How I choose the right comparables is to take a look at the entire list, then determine a range of sales: low medium and high. The low range selections relate to either fixer upper or all vintage, the medium range of comparables relate to Good condition, but only some renovations, the HIGH caliber of comparables are highly remodeled with granite, all new baths and kitchen, appliances and new flooring. Every comparable tries to fit within 20% GLA sq ft size, and try to find the most recent 0-90 day sale date. So when a home is a Fixer Upper and vintage category as the house had a bathroom with problems and other vintage appeal will have comparables selected from that lower range of choices. Upon renovation if that same home has new appliances, a newer finished basement and the bathroom has new tile and is fixed with no cost to cure items then it will compare to a medium range. High caliber homes stand out as exceptionally remodeled and sell for the highest prices.
As far as a % of error, remember that an appraisal is an OPINION of market value as if it was going to be sold in the current market condition. Comparing one appraisal to another mostly will relate to which addresses were selected, and assuming that both were done at the same time frame, had all the same choices.
There is not a set % of error when it relates to one appraisal report either, if done correctly, the final value really is what a house would sell for in THAT condition and with those sales being used for comparison.
An appraiser who does not ask the condition prior to selecting comparables could have a real problem. If he/she assumes the home is highly renovated and many sales are in a certain range, but then upon viewing the inside finds out that it is a fixer upper or simply modest...comparing that house to all highly renovated comparables would be a true mistake...and the final value will end up wrong. Making Condition adjustments for one or two bathrooms not renovated, or other flooring, should be a minimal adjustment if all the comparables were selected from the Right caliber or category in the first place. This brings me back to the Low Med High range.
In my report I include a page called Comparables Evaluated, and that page shows that full range of all that COULD have been selected. More often than not, newer year built homes and larger sq ft, or larger lot homes will fall in to the HIGH price range category on that list. Selecting all HIGH range homes could end up with a lot of "misses" when comparing it to a house if lot size is way off or year built is way off, again bringing a wrong conclusion at the end.
One thing you can look for is the Unadjusted Range of the sales prices, and the Adjusted Range of values (top and bottom lines of the sales grid) If you have unadjusted sales prices that are simply too wide, then something is either off...or there were just no sales that were recent enough that could have been chosen. In the Adjusted Range of values, often, the + and - adjustments tend to equalize a bit, if that range exceeds 20% between the low and high, then it points to one comparable was too high or too low in the group, and maybe the range is too wide again.
One major factor when initially selecting comparables is bracketing. Bracket the sq ft, bracket the lot size, meaning selecting some larger and some smaller. Having an "across the board" upward or downward adjustment might point to the fact that there is an odd feature of the home compared to the comparables that could have been selected, OR it could mean that there were no recent comparables that were on the other side to accomplish bracketing. The lenders see an "across the board" adjustment all positive or all negative means that a comment needs to be added. Also the solution is to simply look at older sales dates, find one that DOES bracket and include that comparable as a bracketing pivot property that meets the lender's demands. It is easier to find one old sale than to explain why there were none available. In the case though of a Huge lot size, where there really is no possible bracketing, then often times a lower adjustment dollar figure is used, such as a FLAT dollar figure, or just $1/sq ft lot size adjustment instead of $5. The reason why is to not over value excess land that is not sub dividable or partitionable.
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Sonja Troncoso is a Certified Residential Appraiser with over 20 years of experience.