406.03: Adjustments to Comparable Sales

Each comparable sale that is used in the sales comparison approach to value must be analyzed for differences and similarities between it and the property that is being appraised.  The appraiser must base his or her analysis and any adjustments to the comparable sales on the market data for the particular neighborhood and for competing locations -- not on predetermined or assumed dollar adjustments.  If an appraiser's adjustments to comparable sales (or the reconciliation of the comparable sales) are based on unsupported assumptions or personal opinion that cannot be supported by market data, poor quality appraisals that could have a discriminatory effect may result.

Comparable sales must be adjusted to the subject property -- except for sales and financing concessions, which are adjusted to the market at the time of sale.  The appraiser must make appropriate adjustments for location, terms and conditions of sale, date of sale, and the physical characteristics of the properties.  "Time" adjustments must be representative of the market and should be supported by the comparable sales whenever possible.  The adjustments must reflect the time that elapsed between the contract date (or the date of the "meeting of the minds") for the comparable sale and the effective date of the appraisal for the subject property.

The subject property is the standard against which the comparable sales are evaluated and adjusted.  Thus, if an item in the comparable property is superior to that in the subject property, a negative adjustment is required to make that item equal to that in the subject property.  Conversely, if an item in the comparable property is inferior to that in the subject property, a positive adjustment is required to make that item equal to that in the subject property.  If an item in a comparable property is equal to that in the subject property, no adjustment is required

A.   Quantitative sales comparison analysis.  Most appraisal forms require the appraiser to use a quantitative sales comparison analysis in which he or she assigns a dollar value to reflect the market's reaction to any features of the comparable sales that differ from those of the subject property.  The proper selection of comparable properties minimizes both the need for, and the size of, any dollar adjustments.  However, when there are no similar or truly comparable sales for a particular property -- because of the uniqueness of the property or other conditions -- the appraiser must select comparable sales that represent the best indicators of value for the subject property and make adjustments to reflect the actions of typical purchasers in that market.  Dollar adjustments must reflect the market's reaction to the difference in the properties, not necessarily the cost of the difference.  Swimming pools, electronic air filters, intercom systems, elaborately finished basements, carpets, and other special features generally do not affect value to the extent of their cost.

We have established guidelines for the net and gross percentage adjustments that underwriters may rely on as a general indicator of whether a property should be used as a comparable sale.  Generally, the dollar amount of the net adjustments for each comparable sale should not exceed 15% of the sales price of the comparable.  When the adjustments exceed 15%, the appraiser must comment on the reasons for not using a more similar comparable.  Further, the dollar amount of the gross adjustments for each comparable sale should not exceed 25% of the sales price of the comparable.  The amount of the gross adjustment is determined by adding all individual adjustments without regard to the positive or negative adjustments.  When the adjustments exceed 25%, the appraiser must comment on the reasons for not using a more similar comparable.

Individual adjustments that are excessively high should be explained by the appraiser and reviewed carefully by the lender's underwriter.  In some circumstances, the use of comparables with higher-than-normal adjustments may be warranted, but the appraiser must satisfactorily justify his or her use of them.  The appraiser must research the market and select the most comparable sales that are available for the subject property, and then adjust them to reflect the reaction of the market to the differences (except for sales and financing concessions) between the comparable sales and the subject property, without regard for the percentage or amount of the dollar adjustments.  If the appraiser's adjustments do not fall within our net and gross percentage adjustment guidelines, but the appraiser believes that the comparable sales used in the analysis are the best available, as well as the best indicators of value for the subject property, the appraiser simply has to provide an appropriate explanation.  If the extent of the appraiser's adjustments to the comparable sales is great enough to indicate that the property may not conform to the general market area, the lender's underwriter must review the property carefully.

For two- to four-family properties, the appraiser must report certain unadjusted units of comparison for the subject property and the comparable sales -- the sales price per gross building area, the sales price per unit, and the sales price per room.  Because purchasers of small residential income properties may rely on these unadjusted units of comparison, the appraiser should consider them in his or her analysis and reconciliation if they are relevant to the typical purchaser's motivation in the subject market area.    

B.   Qualitative sales comparison analysis.  The Desktop Underwriter Qualitative Analysis Appraisal Report (Form 2065) enables the appraiser to use a relative or qualitative sales comparison analysis (instead of providing actual dollar adjustments) to reflect the differences in features between each of the comparable sales and the subject property, by indicating the market's reaction to any significant variations for each feature listed in the "sales comparison analysis" grid.  The "paired" data analysis comparison logic, which is consistent with the way that buyers and sellers typically evaluate the differences between properties, is similar to the logic required by other appraisal forms.  However, in this case, the appraiser does not have to quantify and report the market's reaction by assigning a dollar value to each variation.

•    If a feature of a comparable sale is superior to, or more favorable than, the same feature for the subject property, the appraiser should report a negative (-) relationship.  

•    If a feature of a comparable sale is inferior to, or less favorable than, the same feature for the subject property, the appraiser should report a positive (+) relationship.  

•    If a feature of a comparable sale is equal to the same feature for the subject property, the appraiser should report an equal (=) relationship. 

Our definition of market value requires the appraiser to make adjustments to the comparable sales for any special or creative financing sales concessions.  The appraiser does not have to quantify the dollar amount of such concessions on Form 2065, but he or she must consider whether the sales price of a comparable sale was affected by the concessions and, if it was, report a negative (-) relationship.

In the overall comparison of the subject property and the comparable sales, the appraiser must take into consideration the value relationships for each of the features of the properties, and, for each comparable sale, the appraiser must indicate whether the property is superior, equal, or inferior to the subject property.  In developing his or her opinion of the market value of the subject property, the appraiser should give the most weight to the comparable sales that are the most similar to the subject property based on the relative comparison analysis.