09/17/2015 09:42 am ET Updated Sep 17, 2016

Comparable Sales and Your Home Appraisal

In the vast majority of residential appraisal assignments, the number one tool an appraiser relies on when valuing a home is comparable sales (comps), which refer to recent sales of nearby homes that are similar, or comparable, to the home that's the subject of an appraisal. However, the concept of comps and exactly how and when an appraiser uses them can be confusing.

What are comparable sales?
When valuing a home, an appraiser collects data on the sale prices 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 comps. A similar home truly counts as a comp if the sale has closed. That's because homeowners are free to ask for as much money as they'd like when putting their home on the market, but that doesn't mean that their property is actually worth that amount. Rather, the final sale price most accurately reflects the market value of a home, which is why appraisers rely on that data when completing an assignment. Many of the lenders and insurers of loans also require appraisers to utilize at least three closed sales as comps.

Timing Timing Timing
Ideally, an appraiser will use comparable sales that are as current as possible since more recent sales will better reflect an ever-changing real estate market than older ones. Generally speaking, 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 view is clearly more valuable than a similar home on the same street with no such view. It is the job of the appraiser to select comps that are as similar in location as possible, while also taking into account unique characteristics, to develop the most credible opinion of value.

Property type matters
When appraisers are developing an opinion of the value of a unit in a condominium or co-op project, 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 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 fitness centers, roof decks, pools, parking garages, storage units, loading docks, freight elevators and passenger elevators.

Why you should care?
Comparable sales typically offer the most efficient and accurate way for appraisers to form an opinion of the market value of a property at any given time. While some homeowners may be frustrated that an appraiser won't take into account the asking price or contract price of a similar home as a comp, it's important to remember that recent sales are a far more accurate reflection of the marketplace. At the end of the day, it's up to the appraiser to find the most relevant comps that exist to deliver a credible opinion of value.