Pulling Comps for Appraisal -- Distance or Neighborhood?

Question

Hey All!

A current BRRR rehab project of ours has an interesting location, and I'm wondering if anyone has ever had a similar situation they can elaborate on. Specifically, I'm wondering how it will impact the appraisal a few months down the road... It's a SFH that is situated on one of the last streets in the neighborhood. To clarify, the neighborhood spans about 2 miles (north to south), and this property is located just 4 streets away (0.1 miles) from the southern border, where it crosses into a "nicer" borough.

What I'm wondering is when it comes time for the refinancing process and ultimately, the appraisal, how will comps be pulled? I am imagining the most important factor is the neighborhood where the property is situated, but does that mean a recent sale from 2 miles north will automatically override a similar property/sale from 5 streets away in the other neighborhood, or will both of them be considered? And what if there aren't enough recent sales from our actual neighborhood -- would an appraiser likely pull older comps from the same neighborhood, or look for more recent sales just a few streets over, despite being a different neighborhood/borough/school district? As of right now, there aren't many solid comps and it had me thinking about what our scenario might be in a few months...

I'm sure others have sold/refinanced houses that are on the border of two neighborhoods, so ANY opinions or outlooks would be much appreciated!

George Paquette · Answer

But short answer is that the appraiser must meet guidelines for comparables. Sales with a sales price at or above the value given, sales that are the same feature, or if that is not available, sales with less and more living area, bathrooms, garage stalls, etc.. we call this bracketing to determine the market reaction. Find inferior and superior and determine the markets reaction. If a home has a unique feature (4 bathrooms in a neighborhood where all sales have 2-3 bathrooms, a swimming pool when no other sales have one, etc), the appraiser will often include a sales or sales from a different neighborhood to figure out the market reaction for that feature. So if the home being appraised has a pool and no other homes in the neighborhood have a pool, I will either go back in time (As far as needed to find a similar home with a pool and make market adjustments) or out in distance. If I look in a superior or inferior neighborhood, I will find one sale with that feature and one without, then I would determine the market reaction in a percentage of sales price and make that adjustment. For instance, if I have two sales in a superior neighborhood where one sold for $330k with a pool and one that sold for $300k without, I would round up and apply a 10% market reaction for a swimming pool. Might not be perfect, but I have to have some way to support this adjustment.

The more homogeneous the homes, the easier the appraisal because there are less adjustments to support (or estimate). So if you have a home that is not conforming with the area or has a lot of unique features, you can count on the appraiser doing one of three things. 1) will go far out into other neighborhoods 2) the appraiser will go way back in time 3) the appraiser will make an estimate at the market reaction which rarely works out for the borrower.

I hope this helps you and others in here

Bob Okenwa · Answer

@Robert Kohnfelder

I've seen appraisers do things that defy logic. I had an appraiser go 30 streets and over 1 mile away for a comp into a worse area rather than use a more similar property one street over. Had another appraiser tell me that a 4/3 full remodel with a pool held similar value to an unrenovated 3/2 without a pool.

In theory, you'd want then to use similar closer properties first, but you never know what properties are going to end up on the appraisal, even you supply the comps yourself. Appraisers are a prideful people who seem to march to the beat of their own drum in my experience. 3 appraisers will probably have 3 different values and not use all of the same comps.

So to answer your question, they may throw darts at boards and see what hits or just find whatever is closest. You can't really ever know how they'll be pulled. There are typically more comps than spaces allowed for on the appraisal (depending on how rural or urban your location is), so you probably won't get all of the comps you were hoping for.

Tristan Gardner · Answer

@Robert Kohnfelder

I've had "interesting" appraisers do some weird stuff to me. I honestly think it's up to the individual appraisal and their "mood of the day"

Overall in my area, I feel they appraise based on similar homes (size, beds, baths, updates) both in my neighborhood and in the surrounding area. Once I had an appraisal come from about 5 miles away in what was your typical neighborhood setting on a property that was nothing special.

Robert Kohnfelder · Answer

@Bob Okenwa @Tristan Gardner I think we can all agree that a higher degree of transparency and somewhat of a "standard" would be appreciated when it comes to appraisals. Investors shouldn't have to hope & pray they get a fair appraisal, or that the appraiser isn't going to pull comps/values out of their you-know-what, for lack of a better term. Adding onto what both of you have mentioned, I haven't done too many deals, but out of the handful of appraisers we've dealt with, we've had: polite appraisers who come in high, and polite appraisers who come in low... Rude appraisers who come in low (double whammy), and even rude appraisers who shockingly come in with a fair number. Some of these people scoff when you ask them simple questions about their process.

The key takeaway seems to be that you truly don't know what you're going to get each time you schedule an appraisal, and that's a shame when you have thousands of dollars on the line.

George Paquette · Answer

@Robert Kohnfelder I’m a certified appraiser and can help look at sales. That the appraiser will consider if you need it

Robert Kohnfelder · Answer

@Will Barnard this brings me to an interesting question... how often do you (or anyone in your network) completely cancel and re-start a loan/appraisal process from scratch, based on an unfairly low appraisal? My last appraisal came in much lower than anticipated -- we even appealed it and got them to "add" a 5th bedroom but somehow refused to adjust the value -- and I had people telling me that I would have been better off eating the time + cost of the loan/appraisal, and rolling the dice with a fresh start. In my situation, this was all happening less than a month before our wedding/honeymoon and the cash-out numbers were still great despite the low appraisal, so we played it safe and went with the initial one. I'm unsure if this is a legitimate option if an appeal doesn't change the value, or if anyone knows if there are "rules" that wouldn't allow it in some instances.

Great info either way!

Bob Okenwa · Answer

@Robert Kohnfelder

I've seen posts from a few appraisers here and there, but it'd be helpful if there were more in the forums or a forum category to help explain things a little more in depth as appraisals have been an issue for a lot of investors lately.

I agree with what you're saying, but unfortunately my opinion doesn't mean much in the world of appraising. I've tried chatting with a few appraisers on the phone just pick their brains and understand what they're looking for, but it really on makes things worse as there doesn't seem to be any kind of true uniformity in appraising as it ultimately relies on the opinions of humans and desktop appraisal only rely on data and not what can be seen by the human eye.

Robert Kohnfelder · Answer

@Bob Okenwa all very solid points... and that kind of confirms the first few appraisers I've dealt with since starting to invest/refi. In my opinion, a house with the same beds, baths and square footage that is 0.1 miles away but in a different borough should take precedence over a "similar" property located two miles away, just because it falls within the same neighborhood on a map. Another thing I was wondering is if appraisers ever use ZIP codes to pull comps, because this property has the same ZIP code as the superior neighborhood. At the very least, I'm hoping that all of these uncertainties will allow a few nearby comps to be factored in, even if they aren't solely used for the value.

Pulling Comps for Appraisal -- Distance or Neighborhood?

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