Today we move to page 2 of the URAR 1004 form, and the sales comparison approach.
We’ll point out a few areas that can be confusing or unclear:
Number of comparable sales and listings.
Located on the top two lines of the page: This is not the number of comparables used in the report (but it could be). This is the total number of comparables that the appraiser felt were sufficiently comparable to the subject that sold in the last 12 months that were analyzed. These homes may have a wider range of values than the buyer actually considered - however, these sales have factors that were necessary to analyze in order to develop a credible analysis. The more homogeneous the neighborhood of the subject, the more similar the comparables will be and often resulting in a tighter range. The more variable and rural the area is, the wider the range of comparables will be.
Sales price/Gross living area line
This line is often misused by those who don’t understand it and is most useful in areas where homes and lots are all nearly identical. Otherwise there is wide variation and it causes confusion unless you know how to read it. This line only takes the sales price and divides it by the Gross Living Area (we’ll cover this later) - with no consideration of the number of bedrooms, bathrooms, condition, quality or ACREAGE. In other words, a 100 sf cabin on 5 acres that sold for $10,000 and a 1,000 sf ranch on a city lot that sold for $100,000 would both have the same “Price/Sq ft:” $100. Using this line alone to judge how “comparable” two properties are would be a gross error. Picking comparables is a far more complicated task than applying a single arbitrary metric.
Financing and Concessions
If my home is listed for $100,000 and the buyer offers me $100,000 but asks for $5,000 back to cover their closing costs, how much is the home itself worth?
This is a commonly confusing area of the form, but a simple example may give clarity.
You walk into your local grocery store in search of an Apple. The apple costs $.95. You tender $1.00 to the cashier and they hand you back $.05. How much did you pay for the apple?
Simple, right. Even though you handed over $1.00, you only paid $.95, and the grocer only received $.95. How you spend the $.05 is up to you.
The hand in the back is raised, “But the contract price of this sale includes the concessions?”
And here is the difference in our scenario:
The bank is making a decision to determine if the value of the home is enough to cover the loan amount, NOT the market value of the home.
The appraiser is determining the market value of the home - not the loan decision. We have two very different and important tasks.
It can be confusing, but once you focus in on the buyer/seller motivations (which is what market value is based on) and not on lender banking decisions, the issue becomes more simple. Additionally, the data available would appear to support that the only valid adjustment to be made here is a dollar for dollar adjustment in the market areas that we cover (Westmoreland, Butler, Armstrong, Indiana, Cambria, and some parts of Allegheny County).