In addition to being a Realtor, I worked as an appraiser in Boston during 2003 and 2004, when things were very different. It always surprises me when even some Realtors don’t know what a comp actually is. The Globe’s Sam Schneiderman goes deeper into appraisal world:
Last week, I wrote about why more properties won’t appraise at sale price due to recent appraisal guideline changes. Readers’ comments made it clear that there is confusion over what makes a good comparable sale.
Most residential values are determined by comparing properties to each other. Comparable sales (and now listings and pending sales) are known as “comps”. Although many web sites offering online value estimates use sales in the area as “comps”, not all sales are “comps”, especially for appraisal purposes.
Because I no longer do mortgage appraisals, I checked with Mike Williams of Atlantic Appraisal Associates, an appraiser whose work I respect, to get recent secondary market guidelines for comparable sales. (Fannie Mae and Freddie Mac purchase loans from most lenders and are known as “the secondary mortgage market”.) Mike said:
“Comps (for federally related mortgage transactions) are the most similar and proximate sales to the subject property that fall within secondary market guidelines.
- Comps should be within 1 mile and 6 months, however, most lenders and AMCs (Appraisal Management Companies) require 2 comparables within 90 days plus a pending sale or listing adjusted for anticipated price negotiation, typically 2-5% of the last asking price.
- A comparable should be within 25% of the subject property’s GLA (Gross Living Area) in size, and should not require more than a 10% single adjustment or exceed 15% net or 25% total adjustments for characteristics that differ from the property being appraised. (A comp’s price is adjusted up or down for superior or inferior characteristics as compared to the property being appraised.)
- Although guidelines can be exceeded with explanations, most underwriters and lenders do not consider them good comparables. (The 3500 square foot colonial that sold for 1.2 million on the same street as a 2000 square foot split level that sold for $800,000 would not be considered comparable to it.)
- Sales in towns like Brookline, Newton and Cambridge can have wide variations in sales prices on the same street, depending on factors like size, condition and amenities. Good appraisers typically list recent sales on the street and comment as to why they were not utilized on the comparison grid if they were not considered comparable.”
As the secondary market learns from experience, their guidelines and forms are updated. Lenders use the guidelines as their baseline, adding their own guidelines or requirements. Although secondary market guidelines are not rigid requirements, appraisers report that some lenders and AMCs initially review appraisals with automated software and kick them back to appraisers if guidelines are not met, before reading the appraiser’s explanations. Some reviewers double check appraiser’s estimates against online estimates and question it if it differs significantly.