Comparable Sales -how are they chosen?
Good question. To answer this, I ask another question. Why are they chosen? Why even have them in the report? Well, it has to do with the very basics of defining value.
After all , what is value? Let's take a bottle of water. Many would pay maybe 70 cents for a nice cold one in the middle of the summer. I probably would not pay more than $1.25. I don't VALUE it that much. But, I think that the VALUE for a bottle of water will be much greater if I found myself stuck for a week in a hurricane ravaged island with no other source. How much would I pay then? $2.00? $4.00?
I think you would agree that the situation in which we are it makes a difference. In this case, the difference was the lack of supply, and the overwhelming demand I have for water. Another example - look at the enormous VALUE increase of Michael Jackson memorabilia after his death as opposed to when he was still living. Just phenomenal. What changed? Well - there is no more Michael Jackson "moon-walking" around. The supply is gone.
OK. So. We get the idea. So, the thing about houses is - they generally can't be moved. Once they are built - there they are (unless you are Superman). And, as every real estate agent will tell you, location, location, location is the meat and potatoes of marketing your house and eventually the determinant of your sales price.
In the market place, the VALUE of your house is determined mostly by the constant tug of supply and demand in and around your neighborhood. The best way to find out what the average buyer is willing to VALUE your house at is to obtain what buyers have typically paid for similar houses in your area in the recent past. So, ideally, we want to analyze identical homes to the home we are appraising that have sold last month across the street or next door. Unfortunately, this is the real world, and there are differences between homes, some have pools, some are bigger, some are newer, and some might have been foreclosed on and are in need of repair.
So which ones do we choose? The answer lies with, of course, the subject (the house we are appraising) and the market forces in the area. In some markets, there is a huge difference in sales price between a 2 bedroom versus a 3 bedroom home, while in others, there is no value difference at all. Pools can actually be a detraction in some markets where there has been constant shifts in land causing problems, and in other markets they are greatly VALUED. Remeber the water analogy - suppy, demand. What is the demand for? Living area, garage, granite counters, extra bathrooms? This can be different in each market. That is why it is so important to choose comparable sales that are close by - they share the same market forces. We also want to choose homes with as many similar physical aspects as compared with the subject as possible.
I may think that my water softner system and new tankless water heater that I installed last week is what makes my home the best on my street, but average Joe homebuyer may really not care.
If you don't rember anything else about his blog, remember the words of the American writer and satirist Mark Twain, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."