You’ve been assigned to appraise a property in a remote area, or in a neighborhood where few sales have occurred lately. How do you arrive at an accurate appraisal if you’re not sure of your comparable sales? Can you take an approach to the appraisal that you wouldn't usually use? How could one unusual event or another throw your calculations off?
McKissock recently went over those questions with three expert appraisers—and their consensus is, you can always find a way to give an accurate appraisal.
Verify information for an accurate appraisal
Above all, it’s important to verify your information, especially if you’re relying chiefly on MLS. If MLS information is unavailable or sketchy, you usually don’t need to get creative: you’ll still find time-honored ways to do your job correctly.
“Ninety percent or more of appraisers use MLS as their primary data-gathering source, but you need to question and validate that information,” warns Martin Wagar of Wagar & Associates (Kalamazoo, Michigan). “MLS information must be cross-checked, typically with public records. On a recent assignment, I pulled six comps, one of which was listed as having a two-car garage and full basement. The public record disagreed with that information. Appraisers who do as many appraisals as they can, typically don’t validate their MLS information, and that’s a serious mistake.”
Use the cost or income approach for an accurate appraisal
A lack of comps is no excuse for not doing an accurate appraisal, Wagar says. Even in states with no MLS and no disclosure, or even if the property is a geodesic dome rather than a conventional house, any property can be appraised. If you can’t find sufficient comps, the “cost approach” will usually work. So will the “income approach,” if it’s an income-producing property.
“In the cost approach,” Wagar explains, “you figure out what you’d pay for the land the house sits on, based on what land is selling for in the area, and what you’d pay to build that same property. The property won’t be worth more than the cost of reproducing it.”
Phil Crawford, who hosts the Voice of Appraisal radio show out of Maineville, Ohio, says he handles a lot of rural property appraisals and often has to deal with a paucity of comps. He likens an appraisal to building a legal dossier—only the objective is to prove your case to the lender, rather than to a jury.
“An appraisal is an argument as to value,” he explains. “You have to be specific in how you weight a comparable, and why. Say you’re working with a property that has one perfect comparable in a rural area, but no other sales. You have that one property as your primer; then you look for additional sales that have similar characteristics to the property you’re appraising—like lot size, or a finished basement.
“An appraisal of a remote, rural property will be much more precise work than an appraisal in a cookie-cutter urban neighborhood. There will be more reconciliation involved. There’s no such thing as an unappraisable property; you just have to find a way to do it.”
The income approach to an appraisal often comes in handy in these situations, says Crawford, especially if the property includes a farm and/or considerable land. In some rural areas, he says, land sales will be more common than building sales, and thus an appraiser could combine the cost approach and the income approach. Depreciation of the building is a consideration too, of course.”
The secondary mortgage market’s insistence on certain appraisal standards in all cases must change, Crawford says, if the real estate debt markets are to operate at full efficiency.
“One approach can be supportive of another,” he says, “but today’s banking system wants it all on a 1004 or a 50 285 form—and this is a problem with lending on a rural property. The bank’s requirements are often going to be detrimental to rural borrowers. If the cost approach is the most accurate means of arriving at an appraisal, that might be acceptable to a smaller bank—but it won’t be acceptable to the secondary mortgage market. A national standard isn’t always going to work.”
Look harder when comps are unavailable or unsuitable to the situation
Greg Stephens, chief appraiser at Detroit-based Metro-West Appraisal Co., says he has encountered many situations where conventional comps are unavailable or are unsuited to the immediate situation. A lack of comps isn’t an issue only in remote areas, he notes. It can also be a problem in dense markets where sales are brisk.
“Sometimes an area will boom, and it’ll be hard to find current comps there,” he says. “Look at the Dallas/Fort Worth area, especially towns like Plano and Frisco. They’re anticipating 46,000 new jobs in Frisco’s Five Billion Dollar Mile. Demand is far outpacing supply, prices are up, bidding wars are up. In a situation like that, you have virtually no listings or pending sales to work with, because properties are trading so fast. It’s hard to identify comps, and the ones you have are going to be dated. Meanwhile, you’re working with a Fannie Mae form that demands that you use the most similar comps available.
“When I was a compliance officer with a bank, I developed criteria called the ‘Three D’s’—Distant, Dated, and Dissimilar—to judge the accuracy of comps. How far are your comps, geographically, from the property you’re appraising? How old is your data? Do your comps include pending sales? And in remote areas, where properties are some distance from each other and sales might not be very frequent, the more anticipation you’ll have of a dissimilarity of properties—and thus a greater degree of adjustment will be required. Any comp that is distant, dated, or dissimilar, or a combination thereof, should raise a red flag.”
In a conforming subdivision, Stephens says, an appraiser should not have to go outside of that geographical area to find suitable comps, but with today’s software, polygon maps can produce a significant number of comps—within and without that subdivision—in minutes.
Appraisers often complain that they receive an assignment for which there are no comps—but the solution, almost every time, is, "Look harder!"
Share your thoughts in the comments below: What are the steps you go through when you don’t have a healthy dose of comparables?
About the author
Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His by-line has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at firstname.lastname@example.org.