Comparable property CHARACTERISTICS
What are the CHARACTERISTICS to consider?
In over 17 years in this business, I’ve seen hundreds of properties. My service area encompasses urban through rural properties in an area 40 to 100+ miles distant from the largest metropolitan area in the state. Each appraisal assignment and subject property I do is different from one day to the next. Because of this diverse experience, and some of the essays I write, I am often contacted by other appraisers across the country to discuss report situations that are challenging, complex and questionable.
Such was the case recently. A technical review appraiser for a lender, licensed in my state, called to discuss a report on a suburban location acreage property with significant outbuildings because the comparable data just didn’t look right. I don’t know the specific property location, or who the appraiser was. The appraiser’s refi value opinion was a head scratcher. Massive adjustments were made for the school district differences, while the significant subject outbuildings were not considered as important. As we discussed the subject and comparables, it became evident that the report appraiser did not consider and utilize comparables with similar CHARACTERISTICS to the subject.
So exactly what are CHARACTERISTICS, and why should they matter?
Let’s answer the second part first. CHARACTERISTICS are what property purchasers use, perhaps subconsciously, but in many cases prominently, to decide which property meets their needs the best. One of these, that RE Agents are fond of using, is NOT cost per square foot, as a primary consideration.
CHARACTERISTICS are not static from one house and report to another, unless the appraiser always works on the exact same type of property in conforming neighborhoods consistently. Once assignments move beyond urban areas, the CHARACTERISTICS become the key factors that need to be considered.
What are the CHARACTERISTICS to consider? Well, believe it or not, they are right in front of every appraiser who does assignments using ‘forms.’ Each line on the appraisal form comp grid is an important CHARACTERISTIC. Although, additional line item CHARACTERISTICS can and should be added if necessary. If you are a narrative report writer, ‘forms’ are also useful to determine which items to factor into the written report.
Due to the type of residential work I do, in varied locations, I use a hierarchy of CHARACTERISTICS, or a decision tree, to figure out the most important items, and determine how to research comparables. These are not necessarily in the same order as on the form. Often, the GLA is NOT the most important item. This process works this way (with the adjustments done at time of report writing):
~ Where in the vast universe is the subject located… urban, suburban or rural? Select comparables in the same area. School districts, trading areas and geographic boundaries should be analyzed.
~ Is the property on a typical lot (site), or small or large acreage? I try to ‘bracket’ the subject’s site size with comparables, but it’s not always possible.
~ Are there certain amenity elements on the property important to purchasers? School district, outbuildings including type and use, acreage, fenced pastures, distance from neighbors, dwelling age, views, waterfront, etc.? Try to find properties with similar CHARACTERISTIC amenity items. If the subject has unusual or valuable amenities, extending your search distance or sale date to find similar comparables is perfectly acceptable. Explain why that was done. Market studies may be necessary to determine adjustments. Sometimes certain key amenities are not found. In that case just make an appropriate adjustment to the comparable.
~ Once the above key CHARACTERISTICS are understood, then proceed to the GLA (and basement) living space(s). I generally try to find comparables within a range 75% to 125% of the subject GLA size (or combined living areas which is how RE Agents market properties) – in suburban/rural areas, and narrower size range for urban properties.
~ Actual age, in a range +/- 10 years of the subject’s age. Wider age is acceptable as one moves farther out from urban areas.
Keeping Age and GLA within a narrow range enables lower adjustments for those items. It also demonstrates to the reviewer that you are not using incompatible comparables as a means to ‘push value.’
~ Design (Style) is also important. Try to keep comparables similar; i.e., 1 story designs, multi-level, Manufactured, site-built (including Modular), etc. If comparables are extremely limited, you may need to mix these, and it may be necessary to do a market study to determine any necessary adjustment when different types have to be used.
Understanding and recognizing CHARACTERISTICS on properties is absolutely critical when doing appraisals. These items are easily spotted by experienced review appraisers and loan underwriters. When your comparables have obvious dissimilarities, your report will be dissected and you may be asked to provide additional explanations, or find more similar comps. Worst case is your report will be totally rejected and it will be turned over to your state appraisal Board as a formal complaint.
Pay strict attention to property CHARACTERISTICS, both on the subject and the comparables. Keep comparable CHARACTERISTICS as similar as possible to the subject in reports. Doing so will mean your report will easily pass muster through the various review processes, including Collateral Underwriter.
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Dave, an ostensibly poor quality appraisal being reviewed by a technical reviewer lacking the confidence to just review it and direct his comments to where he SHOULD direct them isn’t necessarily a good reason for all of us to return to appraisal kindergarten.
Maybe that lender just got what they paid for?
Let’s talk experience characteristic of your average appraisal distribution desk worker…
These are good and necessary articles, hopefully the new guys learned something.