Real Estate Appraisal: What’s a Comp?

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.

Mortgage rate report: 8.4.2010

Here’s Brian Cavanaugh’s weekly mortgage rate/float or lock report:

Mortgage rates are at all-time lows right now; 30 year fixed, 20 year fixed, 15 year fixed and even jumbo rates, and they are showing no signs of rising!  I don’t see them going any lower but staying down at these levels for a while.  What’s moving mortgage rates?  No one really knows right now but this is usually what happens, bonds go up, stocks go down.  Stocks go up, bonds go down.  It’s really pretty easy to understand.   However this mortgage market that we are in is nowhere near normal.  In fact, it’s the total opposite, it’s like nothing we’ve ever experienced.

The housing market is stagnating at record low levels.  Refinance loans account for the majority of all present loan production.  Credit guidelines are as strict as they’ve ever been, it’s really brutal.   Home values are off  by incredible amounts.  Mortgage Rates are showing no signs at all of rising anytime soon!

30 year fixed mortgage rates remain in the 4.375% to 4.625% range.  The 30 year fixed rate mortgage is 4.375% for a qualified borrower. 4.125% is presently being offered for two points.


If I was closing on a Home Mortgage in the next 0 to 15 Days – LOCK
If I was closing on a Home Mortgage in the next 15 to 30 Days – FLOAT
If I was closing on a Home Mortgage in the next 30 to 60 Days – FLOAT
If I was closing on a Home Mortgage in the next 60+ FLOAT

Economic Data

Wednesday’s bond market has opened in negative territory following modest stock gains. The Dow is currently up while the Nasdaq has gained. The bond market is currently down, which should push this morning’s mortgage rates higher by approximately .125 of a discount point.

There is no relevant economic data scheduled for release today. This leaves the stock markets to influence bond trading and mortgage rates. If the stock markets move higher from current levels, we should see bond prices fall and mortgage rates rise if the move is sizable. However, if the major stock indexes fall from where they are now, the bond market would likely improve, leading to slightly lower mortgage rates this afternoon.

The only relevant data scheduled for release tomorrow are weekly unemployment figures from the Labor Department. They will post the number of new claims for unemployment benefits filed last week, giving us a small measurement of employment sector growth. This data usually does not lead to noticeable changes in mortgage rates because the data tracks only a single week’s worth of new claims. Analysts are expecting 455,000 new claims, but it will likely take a fairly large variance for the markets to have much of a reaction to this data. This week’s release may carry a little more significance than usual because there is no other data scheduled for release that day.

Friday brings us the release of July’s Employment report that compiles several key employment readings and is based on an entire month’s worth of data. This is a very important report for the financial and mortgage markets and could lead to sizable changes to mortgage rates. I would not be surprised to see the traders prepare for the report by adjusting portfolios late tomorrow and Thursday. This could lead to some pressure in bonds or possibly improvements if market participants are betting on bad economic news coming. The results on mortgage rates should be fairly minimal and could easily be erased after the report is released Friday morning, but it is worth mentioning.

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

By Brian Cavanaugh 617.771.5021
Presented by Joe Wolvek, Gibson-Sotheby’s  Int’l Realty

Credit: Bloomberg, Yahoo Finance, Mortgage News, MBS Quoteline, WSJ, NY Times

Appraisals becoming more difficult…and realistic.

Great blog entry on by Sam Schneiderman regarding real estate appraisals.

Regardless of what a buyer or seller thinks about a property’s value, in the end, the only opinion that probably matters is the appraiser’s.

When mortgage financing is involved, the lender sends an appraiser to the property to make sure that it is habitable, marketable, and worth at least what the buyer intends to pay for it. The appraiser’s job is to do a brief walk-through of the property (not a home inspection) and develop his or her opinion of value based on an analysis of recent sales and current market activity. There’s a saying amongst appraisers that they are the eyes and ears of the lenders.

Until fairly recently, appraisers developed their opinion of value by comparing the subject property to at least three of the nearest, most recent, and most similar sales available. Now appraisers are also asked to include pending sales and/or currently listed properties in their reports. By including currently listed properties or pending sales, the lender is able to better see whether or not current market values are trending up, down or remaining stable.

When appraisals were based solely on historical sales data, it was possible for a property to appraise higher than competing properties were offered for in the marketplace. Now that current listings and pending sales are included in the analyses, we are seeing more properties that don’t appraise for the amount that buyers and sellers have negotiated, particularly when the inventory of unsold properties in some areas causes sellers to lower their prices in order to sell. This could also happen as a result of normal seasonal market cycles.

For most transactions, since it is no longer easy to challenge an appraisal, a low appraisal is cause for the lender to deny the mortgage. Based on fairly standard local purchase and sale language, when that happens, a buyer can choose to pay the difference between the appraised value and the agreed purchase price or cancel the transaction and receive the deposit money back. An alternative to canceling the transaction is for the buyer to ask the seller to reduce the purchase price to the appraised value. Since most sellers have already made plans to move on, most will usually agree to lower the price to the appraised value.

If the buyer has negotiated for the seller to pay some closing costs out of the sale price, the buyer usually has to accept the fact that the seller won’t be too excited about lowering the price while still paying the buyer’s closing costs. In those cases, most buyers need to give up that concession in return for the lower price.