If you’ve been assigned an appraisal in an area where few properties have sold lately, you may be wondering how to arrive at an accurate appraisal when comps are limited. It can be tricky to appraise accurately when unsure of your comparable sales. You may have to take an approach you wouldn’t normally use. Even if you are limited on area comps, there is always a way to give an accurate appraisal.
Verify Information to Ensure Accurate Appraisal When Comps are Limited
If you use MLS as your primary data gathering source, you are not alone. Over 90 percent of appraisers rely on MLS to gather data while preparing appraisals. However, failing to verify the information found on MLS is a major mistake. MLS information may not be accurate. When you are already challenged to develop an accurate appraisal, you don’t want to further skew data but failing to verify accuracy. It is best to cross-check MLS data with public records. Make this a habit with all properties you appraise, whether many comps are available or not.
Arrive at an Accurate Appraisal Using the Cost or Income Approach
Any property can be appraised accurately, even in locations with no MLS, no disclosure, or even if the property is a geodesic dome (opposed to a traditional house). If you are trying to arrive at an accurate appraisal with limited comps, the cost approach will usually work. If the subject property is an income-producing property, the income approach will also usually work.
Using the Cost Approach to Arrive at an Accurate Appraisal
Using the cost approach, you first figure out what the land the home sits on is worth. Do this by determining what land is selling for in the area. Next, determine what it would cost to build that same property. The existing property will not be worth more than the cost of reproducing it.
Using the Income Approach to Arrive at an Accurate Appraisal
If the property you are appraising includes a farm and/or a considerable amount of land, or is an income-producing property for other reasons, factor in the income of the property to determine the value. It is common in rural areas that land sales happen more frequently than building sales. This allows the appraiser to combine the cost approach and income approach to arrive at an accurate appraisal with limited comps.
Take a Closer Look When Suitable Comps Are Limited
When comps are limited or seem unsuitable for the property you’re appraising, ask yourself these questions:
- What is the geographic distance of your comps from the property you are appraising?
- What is the age of the data you’re using? (You don’t want to used old or dated information.)
- Have your comps included pending sales?
Consider the use of polygon maps to produce a significant number of comps for you in a given area in minutes.
You Can Give an Accurate Appraisal When Comps are Limited
The bottom line is that there is always a way to give an accurate appraisal, even when comps are limited. The solution is normally to look harder!
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