How many comps are needed?

Question

If a house only has 2 or 3 comps within the area and 6 month timeframe but the comps have the same features of the house in question (ie. same bdrm/bath/sq ft/age) and the comps are rehabbed properties, will 2 or 3 be sufficient? What is the minimum? Also when determining the ARV, do you use the lowest comp or an average of all relevant comps?

Bill Gulley · Answer

These are unusual times. You must have 3 comps to be compliant with appraisal regulations. The parameter is less than one year and within five miles at the outside, 3 months and within 3 miles is the goal with one comp being within one mile or in the subject neighborhood. 
          
          There should always be comps. But each comp is adjusted to reflect the value of amenities, size, functionality and style which are shown in the market to adjust the comp to the subject, you never adjust the subject property. So, with that, you always have comps, however, you may not exceed maximum ranges for adjustments to any one adjustment or as a total, if it becomes necessary to exceed the range allowed for adjustments, it means that your comp is not an acceptable comp. 10% is the customary adjustment, but may vary depending on the purpose and type of apprisal being done.
          
          The appraisal process is not an averaging of values. If your subject property does not have a fireplace and comp one does, the value of the fireplace, style, quality of materials, workmanship and functionality is then assessed as can be proven in the market (people willing to pay 5K more for a fireplace like that one) and that amount is then deducted from the comp sale price to bring it in line with an estimated value for the sunbject.
          
          Each major amenity is viewed in this manner with all three comps. In the end, it becomes subjective as to what the estimated market value may be, with other factors taken into consideration based on experience of the appraiser.
          Distance to shopping, churches, main avenues, hospitals, parks and recreational areas are all considerations. External obsolecence or aspects of less desirable elements are also considered such as being near a factory where noise or odors are present, high traffic areas or poor condition of surrounding properties are evaluated as well.
          
          Then based on the experience and judgment of the appraiser, an estimate of market value is given for the market approach.
          
          Then, you have the income approach and cost approach (another time).
          
          When all three approaches to value have been completed, then they are weighted as to which more closely reflects the type of value to be estimated. An apprialsal for an insurance company might be weighted toward the cost approach, the cost to rebuild the improvements. But we are more concerned with the market value, so the most weight will be given to the market approach but may be influenced by other values. Then, an estimate of market value is assigned for the subject property.  Good luck.

Bryan Balk · Answer

It only matters what the bank wants.  All bank appraisers are different.  And whoever said go back a year is crazy.  I f you do that your going to lose A LOT of money. Since the tax credit ended there has been a huge drop in prices.  In my area anyway I can't speak of everyone else.  When were trying to find value for just us which honestly means nothing these days max we go back is 3 months and .5 miles away.  If your in a low density area I'm no help sorry.

Matt Kearney · Answer

Ideally I like to use 3 solds, 3 actives, and 1-2 under agreement.

If there are only 2-3 comps, and they are all solds with similar features I would feel comfortable using them. Especially if they are rehabbed comps.

I like to use an average of all relevant comps, with a bias towards the higher ones... because that is where I will usually price mine.

Account Closed · Answer

2-3 good comps should give you a good idea of the ARV.  Are you familiar with the area you are pulling these comps for?

I like to look at current listings as well as recent sales in an area.  The current listings give you an idea of what the competing properties are selling for.

Steve Babiak · Answer

Bill - good job breaking down how an appraisal is performed, with respect to comparables.

Bienes Raices · Answer

What do you guys do when there are no close comps? On a recent offer I made (rejected by bank), the house was 2 bdr, 1 bath, 850 square feet, and the only other 2 bdrs/recent solds in that area were 1100+ square feet.

Bill Gulley · Answer

Can you specify what the purpose of your apprsaisal is. You're getting some poor advice. Check HVCC Appraisal regulations. 2 comps is not statiscal valid.

The answer to your question is NO, 3 and it is not an averaging process.

There is a difference between a market analysis and an appraisal. Good luck!

Michael S. · Answer

instead of going back 6 months try a year, and 3 high comps are good.

Millie Allen · Answer

2-3 is generally what I go for. I also only try to work in areas I know fairly well or one of my partners knows well enough to make a sound judgement.

Also, you may want to interview local investors and get their thoughts on the area.

I've got pretty far humbling myself and asking for help along the way :P

Hope this helps!

Millie

Tiffany M. · Answer

Thanks for the replies guys.
          @ Charles, I am still in research mode and I am becoming more familiar with the houses i'm pulling comps for. They are in my neighborhood and they are the ones that usually have a good number of comps but I also have been looking at houses in different neighborhoods to get a feel for the different price ranges and sometimes there are no sold comps within a mile radius or the other sold houses  vary too much to be considered comps.

How many comps are needed?

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