Appraisal Quality Tip: Location matters — The key to choosing comparable properties

For this month’s tip, we’ll focus on the three biggest factors in real estate. Can you guess what they are? That’s right — location, location, location!! In the world of real estate, location is king as it’s a primary consideration for buyers and the foundation of property values. 

A top revision request item from our mutual customers is around requests to address alternative sales. Oftentimes sales with similar characteristics from the subject’s immediate neighborhood may not have been used. In this monthly update, we want to share with you some important best practices to help proactively address this topic. These tips are specifically designed with you in mind, to help minimize the number of revision requests you receive through a well-supported and credible appraisal report! 

Why is it important to choose sales that capture the subject’s immediate location?

  • Buyers generally prioritize location. Lenders have access to alternate sales and often inquire about neighborhood sales as they need to understand the marketability of the subject, in its current location. 
  • Properties with similar features in different areas (across defined neighborhood boundaries) may not yield the same value. 
  • Depending on location, features such as condition, quality of construction, room count, etc., can vary in market reaction.

Three common location issues and solutions to reduce revision requests

1. Issue: No recent sales from the subject’s neighborhood 

Solution: In many instances it can be appropriate to extend the search 12-24 months back in time, to locate comparable properties from the immediate neighborhood. When there are no recent sales, include comments in the appraisal report, to let lenders know the search parameters used to locate a competing sale from the subject’s immediate neighborhood.

2. Issue: Neighborhood sales do not bracket a salient feature

Solution: Use comparables from both inside the subject’s immediate neighborhood as well as outside the neighborhood. This approach captures location and provides bracketing for features. It is also important to explain if the lack of similar comps in the subject’s immediate neighborhood is a result of market conditions or if the subject is an over/under improvement.

3. Issue: Including distant sales or those crossing boundaries is unavoidable

Solution: Including comments like, “comparables may be further than 1 mile” or “may cross boundaries” won’t suffice. Include commentary in the report to explicitly justify the use of distant sales and provide supporting data, such as a price per square foot comparison or neighborhood median sales price comparison, to support any market reaction for the competing neighborhood and subject neighborhood.

Example of Acceptable Commentary: The subject’s market is rural with only 13 total sales over the previous 12 months, therefore it was necessary to expand the search 15 miles in distance. Although sale 2 and 4 are located in a different city than the subject, median values for the subject’s city over the last year show $256,000. Median values for the city for sale 2 and 4 shows $261,000. Based on this no location adjustment is warranted. 

Recognizing location as the most important factor in comp selection, prioritizing proximity, and using the solutions shared above, will ensure accurate valuations that inspire trust and confidence among clients.

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