Photo credit: Sheila Sund
You have an appraisal assignment in a neighborhood where few sales have recently occurred, or the property is in a very remote area. How do you arrive at a solid opinion of value if you’re working with little comparable data? Should you try a little-used approach to the appraisal? Should you use a valuations approach that you wouldn’t ordinarily use?
We recently posed these questions to Paul Prentice, Senior Managing Appraiser at PEMCO Valuations.
“In a market with few comparables, there is typically a reason whether its low turnover in general, a rural area with few homes, or you are appraising a unique property with few or no truly similar sales available. In my opinion, its initially necessary to understand the market and identify why few comparables exist.”
Prentice on how to account for working in a sparsely populated area or in a market with little transactions, “In the case of rural or slower markets, don’t be afraid to go back in time to obtain relevant data. While Fannie Mae prefers sales within one year of the appraisal, this is not always feasible and it would be necessary to obtain data from the immediate area to understand what that particular market yields. Additionally, when comparing the subject market to another, it would be prudent to obtain data from the immediate area to analyze against competing areas to confirm if location or market condition adjustments must be made. It can also be reasonable to use sales which fall outside of historical net and gross adjustment percentage guidelines, which are actually no longer in place. Either way, it’s likely that comparable data can be located, it’s just a matter of how much research must be done to analyze it all accurately.”
Cost or income approach?
Prentice said, “There is potential for the cost approach or income approach to be utilized as well to determine value, however in a rural market with scarce comparable sales, it is likely that the income approach will not be an appropriate method. Cost approach is feasible but must be researched to the fullest degree and accurate. While these are acceptable methods, in my experience some of the larger lending institutions will question these, making it all the more important to locate and utilize the best available sales for comparison. The ability to adjust is in place for a reason.”
Prentice underlines the importance of accurate information in getting a good result, “Most importantly, it is necessary to verify, verify, verify and disclose, disclose, disclose. The more accurate and verifiable the information is the better the result will be. Additionally, the more disclosure and explanation you can provide, the more the reader can understand the thought process of the appraiser and how they were able to arrive at their conclusion and the better the result will be.”
Prentice said, “Small things, like proper sentence structure, grammar, and flow all assist in completion of a clear and accurate appraisal report. If it is necessary to utilize comparables which may not be similar or you use another approach to value, explanation and accuracy are key.”
What do you do when you don’t have a healthy amount of comparables?