Ah, the complexity of comps. In college, comps are stressful final exams. In restaurants, to “comp” something means to give it away to a customer, usually because of a fly in the soup. In real estate circles, comps, a shortened term for comparable sales, ultimately provide guidance for the list price and potentially for the mortgage too.
To determine comps, an agent looks at similar properties that have recently sold in your area. An appraiser will do the same. As you seek to understand how comps affect the home-selling process, consider the following myths:
Myth 1: The appraiser is familiar with your neighborhood
Truth: In response to the mortgage crisis a few years ago, lending agencies laid the smack down on policies surrounding appraisals. One rule requires appraisal management companies to use appraisers who are neutral (not influenced by lenders, for instance). As a result, these companies may hire appraisers who live across the state and have no familiarity with your area. This can lead to an appraiser determining your home’s worth based only on comps, which may mean it’s not appraised at what it’s really worth—which makes the next point very important.
Myth 2: Appraisers and Realtors can’t talk
Truth: When an appraiser comes to look at your house and assess the value, your real estate agent should be present. The agent knows your house and probably has extra information about your neighborhood, as well. If similar homes in the area have been foreclosures or short sales, your Realtor should provide this information to the appraiser. Note: you can ask the appraiser to eliminate short sales and foreclosures from their comps, but if your neighborhood has experienced several of them, the appraiser may be unable to avoid it. Also, if you have features or improvements in your home that won’t be reflected in comparable listings (granite countertops, hardwood floors, updated bathrooms, etc), a Realtor will be able to point those out for a more accurate price point.
Myth 3: Dressing up your house will add significant value
Truth: Appraisers are comparing your home to others with similar square footage, location, and age. The key words here are measurable data, or numbers. That gorgeous mural of the Grand Tetons that you have painted on your basement wall will make little difference when considering comps. Talk with your agent about legitimate upgrades that will add value as opposed to upgrades that represent unnecessary work and expense. And keep in mind that while dressing up your house may not affect the appraisal value, it can significantly affect its appeal to buyers and the amount of time your home is on the market.
Myth 4: Appraising a home via comps is an exact science
Truth: Appraisers do their best based on the information they have. Sometimes the process is easier than others. A lender has some recourse if the appraisal comes back below the offered price of the home. One strategy is to ask the appraiser to further research comps in the area in order to gain a broader view of the local market. The lender, too, can submit more comps for the appraiser to consider. While it would be nice if the value of a home stayed constant, the truth remains that the value of a home is equal to what buyers are willing to pay, and comps offer the best prediction of that information.