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Appraising a Subject with “No” Comparable Sales

Appraising a Subject with “No” Comparable Sales

It’s every appraiser’s nightmare. They’ve just been engaged to complete an appraisal assignment on a subject property in an area with a lack of what they perceive to be truly comparable sales. What will they do? Say the home can’t be appraised? Run from the assignment like they would if the subject was an earth-bermed geodesic dome? I think not!

Rather than walking away from what you may believe is a complex assignment due to concerns specific to a paucity of sales data, I’d ask that you consider why these types of assignments can be beneficial for an appraiser as they endeavor to improve upon their professional acumen, and why these “un-appraisable” properties are actually less likely to lead to underwriter scrutiny during the client’s review process.

Let’s start with an examination of the appraiser’s charter, found within the Preamble of USPAP, “The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraiser. It is essential that appraisers develop and communicate their analysis, opinions, and conclusions to intended users of their services in a manner that is meaningful and not misleading.” When an appraiser takes on an assignment where truly comparable sales are nonexistent, the appraiser should proceed with the aforementioned preamble in mind, with specific attention paid to the fact that they – the appraiser – are engaged (1) to maintain a high level of public trust, and (2) to communicate their analysis, opinions and conclusions in a manner that is meaningful and not misleading. In other words, be thoughtful and transparent throughout your report development process.

Beyond the guidance provided in our professions charter, what does USPAP state about the identification and use of comparable sales? Per STANDARDS RULE 1-4, APPROACHES TO VALUE: In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results. (a) When a sales comparison approach is necessary for credible assignment results, an appraiser must analyze such comparable sales data as are available to indicate a value conclusion. You’ll notice, the guidance prescribed in USPAP doesn’t state the appraiser is responsible for the identification of perfect matched pairs as part of the appraisal report development process. Instead, it states the appraiser must analyze such comparable sales data as are available. This indicates that USPAP affords the appraiser the latitude they’ll need to accommodate an appraisal of a property with less than ideal comparable sales available for analysis.

What does Fannie Mae have to say about it? Per FNMA’s Selling Guide section B4-1.3-08, Comparable Sales, the Enterprise states: Comparables that are significantly different from the subject property may be acceptable; however, the appraiser must describe the differences, consider these factors in the market value, and provide an explanation justifying the use of the comparable(s). If a property is located in an area in which there is a shortage of truly comparable sales, either because of the nature of the property improvements or the relatively low number of sales transactions in the neighborhood, the appraiser might need to use as comparable sales, properties that are not truly comparable to the subject property. As with USPAP, the guidance offered by FNMA provides the appraiser sufficient flexibility to employ their best judgment when utilizing less than ideal comparable sales, provided the appraiser explains their reasoning in detail.

So, how should an appraiser go about expanding their search parameters when they are unable to find relevant sales via typical search criteria? Well, in reality, it depends. It depends on the reasoning for the lack of sales in the first place. Is the subject located in an extremely rural market? Is the subject’s improvement atypical in design characteristics as compared to available proximate housing stock? Are you finding that there has been a higher than typical rate of retention for properties in the subject’s market, yielding few, if any, recent comparable transactions? Depending on the circumstances associated with the assignment in question, the appraiser may choose to expand their search to include more distant sales, significantly dated sales, or even sales that don’t represent the subject’s physical characteristics.

The key to relying on any of these alternative approaches to identifying “comparable” sales while still yielding credible assignment results lies with the appraiser’s explanatory commentary. If the appraiser provides expansive narrative commentary outlining why they used the comparables they selected, what expanded parameters where relied upon, and why they chose to expand their search in the way they did, the likelihood that they will be engaged on a subsequent revision request is reduced exponentially.

Remember, a lack of truly comparable sales doesn’t mean that a property can’t be appraised, nor does it mean that the assignment is too complex. It just means you will need to remain open minded when it comes to identifying what sales should be leveraged, and you’ll need to provide more substantive commentary when reconciling your report findings to ensure your appraisal isn’t misleading, and your value conclusion is credible.