Ask Our Broker With Peter G. Miller: Bad Value

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Question: We have an agreement to sell our home but the appraisal came in low. This has set off big problems with the buyer who now wants us to reduce our price. We think the comps used by the appraiser hurt our case. How do appraisers pick comps?

Answer: With a residential transaction, appraisers will look at comparable sales in an effort to determine the fair market value of the subject property. Two appraisers, using different sets of comps, can justify very different values for an individual home. The result is that it becomes important that appraisers pick the comps that best reflect the fair market value of the property.

So what are the best comps? They have several characteristics, including:

First, the more recent the comp the better.

Second, we want to look at like properties. We want to compare homes with three bedrooms, two baths and 2,000 sq. ft. of space with homes that have similar characteristics. The comparison properties are not required to be identical, however the appraiser will have to make adjustments when differences are significant.

Third, we want comps that have a close physical proximity. You often hear people say “if this house was located in the Smithville neighborhood it would be worth $150,000 more.” The point of course is that it’s not located in the Smithville neighborhood. In real estate location is critically important therefore to the extent possible appraisers look for nearby properties to use as comps.

Fourth, we want to make sure that the use of the properties is similar. A recent twist concerns the use of short-term overnight services such as Airbnb. If we have two like properties and one generates $1,000 a month in overnight rentals while the other does not, do they have the same value?

Fifth, both comps in the subject property must be selling under the same conditions. For example, a home sold in foreclosure situation is likely to have a very much different value than a similar property which is being marketed by an owner who was not forced to sell. Or, there can be a big difference in reported values when one home is sold at fair market value while another has been sold for “good” consideration, an expression which means love and affection.

In your situation you want to speak with the appraiser and ask if other comps can be considered. The appraiser may well have a very good reason for selecting the comps that were used. Alternatively, you might want to ask the lender if it makes any sense to get a second appraisal. This, of course, will be an additional expense and it’s possible that the answer may be the same or maybe even worse.

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Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.