Sometimes I am asked, when searching for comparable sales, do appraisers have to stay within a mile of the property being appraised? The answer is that it depends. By the way, that’s the typical response that an appraiser will give you when asked a question about appraising. And rightly so. There are may things that an appraiser has to consider when developing an opinion about the most probable sales price of a property.
MISCONCEPTIONS ABOUT PROXIMITY
The Uniform Standards of Professional Appraisal Practice (USPAP) do not give any limitations regarding proximity, when searching for comparable sales. The appraiser simply has to use the most comparable and proximate sales. Sometimes the most comparable sales are over a mile away. Sometimes they are less than a mile away. It really depends.
Some of the lenders that I complete appraisals for, like to see comparable sales within a mile in urban neighborhoods, two miles for suburban neighborhoods and five miles in rural areas. However, most lenders recognize that there may be times when this cannot be achieved. Therefore, the appraiser simply needs to explain in the report why it was necessary to exceed these proximity parameters. The reason for these lender guidelines is that typically, in urban neighborhoods, there is a higher density of homes, usually resulting in numerous comparable sales typically being located in relatively close proximity to the property being appraised. Whereas rural or low density areas have fewer sales. Therefore, the appraiser will generally have to expand the proximity search to other comparable areas, often over a mile away.
I think that there is also a misconception by some that simply staying within a mile is all that is needed for a comparable sale to be comparable in terms of location. Sometimes within a mile of a property, there may be major differences in neighborhoods and/or market areas in which a comparable sale might not be in a comparable location, despite its being within a mile of the property being appraised.
Earlier this year, I had a home owner tell me that they had their home appraised a number of years ago by a different appraiser. They said that this appraiser told them that they were able to use sales in a completely different city, because the sales were within a mile of their property. There may be times when this is true, but this was not one of those times, as I will demonstrate in this article.
The adjacent city has, at least in my twenty years of appraising, always demanded higher sales prices than the city in which the property I was appraising was located. It should be noted that this is a high density neighborhood with many potentially comparable sales that have sold with the previous year. This is exactly the kind of situation in which dishonest, or inadequately trained appraisers, can artificially inflate opinions of value. It looks great on paper. Three seemingly comparable properties, all within a mile of the subject property. However, as I am about to demonstrate, being within a mile is not always the benchmark for being considered a comparable location.
Here are a few examples from my market to demonstrate the danger of thinking that it’s always okay to use sales within a mile.
This first example is reflective of the situation and location in my introduction. I was appraising a home in Warrensville Heights, which is south of the yellow line in the map below. The yellow line is the city line between Shaker Heights and Warrensville Heights. Notice the large difference in sales prices. Driving through these two neighborhoods, you might not realize the difference. They both have relatively similar feels. The homes in both neighborhoods are similar in terms of style and size. The lot sizes are comparable. It would be easy to find homes that had comparable lot sizes and building characteristics. However, Shaker Heights offers a superior market appeal due to its superior school system and city amenities. Clearly the neighborhood boundary is the city line and not a one mile proximity.
The other appraiser used several sales from Shaker Heights, resulting in an artificially inflated opinion of value.
DIFFERENT CITIES – SAME SCHOOL DISTRICT
My next example is in the Village of Bratenahl. The Village of Bratenahl is located within the Cleveland City School District. It is located north of I-90. Notice the huge difference in sales prices north of I-90 vs. sales south of I-90, within a mile.
While sales north of I-90 are located within the same school district and are within a mile of properties south of I-90, there is simply no comparison. The numbers on the map are not typos! There is really that much of a difference. I-90 is clearly the boundary between neighborhoods. Clearly, just because a home is within a mile of the subject property and even within the same school district, this does not automatically mean that it is comparable in terms of location.
SAME CITY – DIFFERENT SCHOOL DISTRICTS
The next example might be a little trickier. The majority of the city of Cleveland Heights is located within the Cleveland Heights/University Heights School District. However, there is a small portion Cleveland Heights, on the northwest portion of the city, that is located within the East Cleveland School District. Notice the difference in sales prices as a result of this difference in school districts.
In this example, while being located within the same city, the difference in school districts makes a sizeable difference in sales prices.
Sadly, I have seen some appraisal reports that have stated that the neighborhood boundary is a one mile radius subject property. That is highly improbable. I have never seen a market area or neighborhood in which the boundaries are as clean as a simple radius.
The Appraisal of Real Estate 14th Edition states that to identify the boundaries of a market area, an appraiser:
- Examines the subject property. The process of defining a market area’s boundaries must start with an analysis of the subject property.
- Examines the area’s physical characteristics. The appraiser should drive or walk around the area to develop a sense of place, noting the degree of similarity in land uses, structure types, architectural styles, and maintenance and upkeep. Using a map, the appraiser can identify points where these characteristics change and not any physical barriers-e.g., major streets, hills, rivers, railroad tracks-that coincide with these points.
- Determines preliminary boundaries on a map. The appraiser indicates lines on a map of the area to connect the points where physical characteristics change.
- Determines how well the preliminary boundaries correspond to the demographic data. The market area boundaries are often overlaid on a map of geographical areas (e.g., zip codes, census tracts, block groups). The appraiser’s observed market area and the areas for which data is available seldom match up perfectly. The information available for census tracts, zip code regions, and counties must be segmented to delineate pertinent sub-markets.
There is more, but you get the point. As demonstrated in this article, there are many factors to consider when it comes to determining neighborhood boundaries. Each neighborhood has its own influences, both good and bad.
SOMETIMES YOU HAVE TO GO BEYOND A MILE
As noted earlier, USPAP does not have any proximity guidelines. The three examples I provided are in urban and suburban areas in which there is a high density of homes and a subsequent large number of sales to choose from. However, there are times when an appraiser must go beyond a mile.
When appraising very unique homes or appraising homes in less dense areas, it is common for the appraiser to have to go beyond a mile in order to find comparable sales. I have appraised some luxury homes that were so unique that I had to travel over 50 miles away in order to find something truly comparable. When appraising in rural areas, it is very common to have to travel well beyond a mile to find comparable sales. Of course, as appraisers, we try to find the most comparable sales that are closest in terms of proximity.
As demonstrated in this article, sometimes school districts play a part in determining a comparable location, and sometimes they don’t. While at first, proximity appears to be an easy way to determine whether a location is comparable, generally a more careful analysis is needed.
Kind of like this drone being used to get into close proximity to the power lines. Using a drone to fly near power lines to torch debris for removal, may have seemed like a no-brainer at first. What could possibly go wrong? I am not sure if someone really thought this through. I digress.
Just going on auto-pilot and thinking that a comparable sale’s location is comparable merely because it is located within a mile of the property being appraised, is not advisable. This is where geographic competency really comes into play. Appraiser’s have to do the work necessary in order to really understand a market and a neighborhood. They must do the research necessary in order to determine whether or not the location of a comparable sale is truly comparable to the location of the property being appraised. Proximity is only part of the answer!
Thank you so much for being here and reading my blog! In the later part of 2018 I was writing a weekly blog. In 2019 I am going to write two or three blogs a month. I hope that you will continue to read my blogs this year along with other great appraisers from around the country that are working so hard to provide the public with good information. This information helps the public to learn about what we as appraisers do and why we do it! Have a great day!
Here are some other articles and videos I enjoyed recently! I hope you will also…
Housing Is Skating On Thin Ice And A Private Resolution – Housing Notes by Jonathan Miller
Real estate trends to watch in 2019 – Sacramento Appraisal Blog
Appraisal Process For Consumers – Ann Arbor Appraisal Blog
Top 5 Appraisal Blog Posts of 2018 – Birmingham Appraisal Blog
Be Careful Who You Choose To Follow! – The Real Value Podcast!
Why Should An Appraiser Join An Association? – The Appraiser Coach Podcast
An Appraiser’s First Impressions of Clear Capital’s AVM – Portland Appraisal Blog
How Do You Measure Believability? – George Dell’s Analogue Blog
December Newsletter – DW Slater Company, Real Estate Appraisal Blog
The Appraiser Gap Between Where We Are & Where We Want to Be – The Appraiser Coach
2018 Home Sales Prove Slowing Trend – Baton Rouge Housing Report