Breaking Down an Appraisal Report Part 2: The “Sweet Spot” of Data

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Determining home values largely relies on examining real estate data.

The "Sweet Spot" of Data ...

And What Happens Once I Find It.

Writing well-supported and thorough appraisal reports comes down to two primary tasks: gathering strong, reliable sales data from the subject property’s market, and analyzing that data. The focus of this post will be on how I identify the comparable sales market of the subject property I am assigned to appraise and once identified, how I use that information to direct me to the property's value.

Like many appraisers in Colorado, I utilize our state's largest multiple listing service (MLS), REColorado.com to gather my real estate sales data. ReColorado is a real estate data and services company serving home buyers, sellers, and Colorado’s real estate professionals, brokers and appraisers alike. The company is the 16th largest MLS service provider in the country and is a trusted and reliable real estate data source.

When I begin my search for comparable properties, I aim for a specific ratio – what I call my ‘sweet spot of data.’ That ratio is generally 2:1 or 3:1, where the number of overall sales within my subject's wider market is 2 to 3 times more than the smaller number of competitive sales within that same market.

For example, in densely populated markets (i.e. Colorado suburban communities like Highlands Ranch, Castle Rock, or Aurora), I may start off with 250 properties that sold within 12 months from the date of the appraisal inspection. But I will ultimately narrow that number down to 80-120 properties (which ideally breaks down to 20-30 comparables per quarter).

Here’s a closer look at how I get to that ‘sweet spot’:

First, I determine the initial search parameters with the base factor being all sales within 12 months from the date of the appraisal inspection. Using the highly dense community of The Meadows in Castle Rock Colorado as an example, I then draw the boundary lines around what I consider the wider market of the subject property. This could result in as many as 600 sales (in truly densely populated areas) or as low as 50-80 sales (in lightly populated areas, including small towns or rural/agricultural areas). In this case, the result was 508 sales (see image below).

Identifying subject's overall market of The Meadows.

Too much data can be just as problematic as too little data. So my next step is to narrow the boundaries down to properties that sold within a 1 mile radius from the subject. Depending on the subject property and the market, I often times extend the radius beyond a mile when appropriate. In this case, let's say the red circle in the image below represents our subject property's location.

And by focusing on the sales closer to the subject, I am down to 275 sales. Closer but definitely not where I want to be.

Next, I begin setting targeted parameters based on what I consider to be the subject property’s primary variables, generally starting with above grade square footage. Using the Castle Rock example, let's say my subject property is a 2-story 2000 square foot home with a finished basement.

In employing the Sales Comparison approach to value, appraisers are obligated to do what is called ‘bracketing,’ making sure the sales we choose to compare to the subject ‘bracket’ specific property features. Among the primary features we tend to bracket are size or GLA (gross living area), basement square footage (when applicable), site size, and age of the property.

Based on my knowledge of the subject's market, I set my initial square footage parameters at 1500-2500 square feet to capture properties smaller and larger than the subject.

The result: 167 sales, which means I’m closer but still not quite there (and the math is simple here … 167 sales ÷ 4 quarters = 41.75 or 42 rounded up). Remember, I’m in search of that magic number … or magic range … of 20-30 comps per quarter.

Finally, since my subject property is a 2-story with a basement, I get rid of all 1-story ranch style properties and exclude all sales of homes that have no basements. The result: 83 sales. Success! I have found the 'sweet spot,' and consider these 83 sales to be the most competitive properties within my subject's market.

What happens next? Well, that data does a lot of heavy lifting. It is the basis for all of the analysis that ultimately leads me to reach the value conclusion of my subject property.

First, I’ll use the data to select my top 6-9 comparable properties (or ‘comps’), as by the time I get to this step I’ve already collected basic information about my subject property from multiple sources. That information includes sale and ownership history, location, neighborhood characteristics, GLA, view, site size, basement or no basement, and zoning information.

For homeowners who are refinancing their homes or non-lender clients seeking current market value appraisals, I also send them a questionnaire about their properties. My goal is to be well informed about the general features of a home – like types of flooring, countertops, and ages of roofs, kitchen appliances, and utilities – well before I set foot in the house. All the subject property information I gather helps hone my search for comparable properties.

Since this blog post is specifically about the data utilized for writing reports, I’m not going to spend too much time explaining the appraisal inspection portion of the appraising process. That’s another post for another day. Suffice to say, because I usually have a suitable amount of information about the subject property, I almost always select my comps before heading off to do the inspection.

Once I’m back in my office following the inspection, I utilize that same ‘sweet spot’ of data to dig in and identify market trends and conditions within the subject’s market. Is the market increasing, declining, or stabilizing? The data will tell me. Are sales listings going up or down? The data will tell me. Are sellers getting what they are asking for? Known as the ‘Sales to List ratio,’ the data will tell me that, too. These are only a few of the factors I look at when considering the overall pulse of the market.

After analyzing the data, the state of the subject property’s market becomes clearer. Using our 2-story Castle Rock house as an example, we’ll say median sales prices in that market were stable, list prices were stable, and Sales to List ratio was 99% (meaning 99% of sales within that market sold at list price, while 1% sold under list). I’ll include commentary in the appraisal report summarizing these market conditions, with those conditions playing a role in what happens next.

The two most enjoyable parts of the appraisal process for me are: 1) the inspections, where I get to visit cool, beautiful, and sometimes just plain interesting homes and enjoy pleasant conversations with homeowners and real estate brokers.

And 2) performing the sales analysis portion of the appraisal report. Oftentimes the most time-consuming, the sales comparison analysis is like solving a mystery. Sometimes it’s a straightforward “The Butler did it” kind of challenge. Sometimes it’s more akin to a full-on Sherlock Holmes situation.

Whatever mystery awaits, the Sales Grid is where, to me, the fun begins.

Sales Grid page from a residential appraisal report.

It is here I get to direct my focus solely on the subject and the comps. I generally end up with 6 comps for reasons I won’t bore you with here. During this phase of the appraisal process, I utilize four important tools – 1) an online software analytic service that provides support for making adjustments, 2) my handy dandy calculator and … wait for it …

3 & 4) a good old fashioned No. 2 leaded pencil and a blank sheet of paper (or sometimes two or three)…

While I am unashamedly a data nerd and self-proclaimed tech freak, I still like to keep one foot (or in this instance, one hand) in the non-tech world. I like putting pencil to paper and hashing out some of the numbers until I get the answers that make the most sense. And with these three instruments of analysis, I begin making my adjustments.

Making adjustments is dependent on the differences separating my subject from the comps. For example, if my subject has mountain views and 3 of the 6 comps do not, there will be upward adjustments made (in favor of my subject) to the 3 comps with no mountain views. If my subject property has a 2-car garage, and 4 of the 6 comps have 3-car garages, there will be downward adjustments made (against my subject) to those 4 comps. And so on and so on.

Here's a glimpse of an adjustment made in the View field of the Sales Grid. The subject (circled in yellow) had beneficial mountain views, and two of the comparables had Neutral/Residential views. Notice the $5000 upward adjustments in those two columns.

Example of an upward adjustment for beneficial view.

The overall purpose of making adjustments is to bring the adjusted sales prices of all the comps closer together. In a perfect world, if the sales prices of the 6 comps were $100,000, $150,000, $160,000, $170,000, $180,000, $190,000, and after adjustments the adjusted sales prices for each of the 6 comps became $140,000, determining my opinion of value of the subject property would be very simple. It would be $140,000.

Unfortunately, it is never that simple, and the adjustment process can lead to long nights fussing with pen and paper AND online analytics until the numbers make sense. But once those numbers line up, I can clearly and confidently provide my value conclusion, and all becomes right within my wonderful appraisal world.

I should add that while what I've written here is my process for analyzing data and drawing value conclusions, the process for other appraisers could be dramatically different, with many having been trained differently and more still who utilize an array of different analytic tools. But in the end, it all comes back to that “sweet spot” of data, an appraiser’s consistently reliable guide for solving the great mystery of value.

Learn more about what goes into the work of an appraiser. Check out additional posts here, or peruse the pages of our website to gain insight into all the valuation services TSR Appraisals LLC provides.

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