Say what you will about sprawling new subdivisions, they’re a residential appraiser’s dream. There’s nothing easier than putting a value on a house when there have been 4 sales of the exact same model on the street in the past 6 months.
But what happens when you’re faced with, say, a beautiful 90-year-old home that’s been renovated multiple times over the years, has a larger backyard than the newer properties which have sprung up around it – but also a 25-year-old oil furnace and a retrofitted bathroom that’s only accessible by walking through two bedrooms.
Or maybe you’re appraising a rural property in a sparsely populated or less desirable area, and there haven’t been any sales of any kind in the neighbourhood in the past year.
Being one-of-a-kind is great in art.
It’s less great in residential real estate.
Good appraisers are (generally speaking) naturally conservative: They’d much rather deliver a value that they can back up with data and evidence than rely on their ‘gut feelings’ about a property.
(At the same time, appraisers who have been working steadily in a particular geographic region for 10 or 20 years end up with the ability to give pretty accurate ballpark valuations that look like ‘gut’ feelings but are in fact based on years’ worth of data.)
But how do you arrive at a value that you can stand behind – and defend in court, if required – when there aren’t recent comparable sales to point to? How do you anchor your valuation in data when that data doesn’t exist?
Time, geography and cost
Generally speaking, when it comes to putting a value on a residential property that doesn’t have comps, appraisers can do three things:
1 Go back a little further in time. In a fast-moving real estate market, appraisers always look for recent sales (usually within 3-6 months), because older sales won’t be reflective of changing market conditions. But for the ‘unicorn’ properties, the first step is to look for older sales. Ideally, the appraiser won’t have to go back more than 12-18 months, but in cases of really unique properties (I once had to appraise a rural property that had its own lake – not a feature you come across very often), it might be useful to go back a couple of years.
2 Broaden the search area. In areas where lot sizes are large and properties are spread out over a wider area, or where two or more neighbourhoods are considered to have similar utility and appeal, comparable sales might be drawn from further away than may be customary.
3 Do a cost analysis. This can be as simple as ‘How much would it cost to buy land and build a house like this?’ or use a locally-accepted cost per square foot. This method can be helpful if you’re trying to put a value on a recently-built 7,000 square foot mini-mansion. It’s problematic for a triple-brick century home with ornate gingerbread trim, since that kind of construction really isn’t replicable.
It’s a combination of factors –
and buyers have to be considered
When there are few direct comparable sales, it’s crucial to use a combination of the time/geography/construction cost methods, since none of them on its own is going to deliver the accuracy you’d get otherwise.
And there’s a fourth factor: What’s in the mind of the ‘average purchaser’.
While an appraiser may be looking for a comparable sale as close as possible to the property being valued, the ‘average purchaser’ may in fact consider two neighbourhoods, 5km apart, to be equally desirable – and therefore comparable. The ‘average purchaser’ of a rural property may not care whether the home on the property has 3 or 4 bedrooms, as long as there is a usable outbuilding for their woodworking equipment.
It’s always a balance.
Like so many things with appraisals, finding the ‘right’ or ‘objective’ value for a given residential property is about finding the balance between ‘willing to sell’ and ‘willing to buy’. Sure, appraising a property with few direct comps can seem difficult, but in fact it’s a good opportunity to focus on all the ways purchasing decisions are made – and that’s almost always a useful exercise.