Comparing Apples and Oranges: Case Study #17
I’ve posted previously about how a slow market — combined with a relatively unique property — can bedevil Realtors and appraisers alike trying to estimate a home’s value.
That’s because to be valid, a comparative market analysis must include three sales of similar properties no further back than six months (some banks are now requesting three months or more recent).
One common approach now is to fill in the vacuum with a distressed sale, i.e., a foreclosure or short sale.
Worse, the distressed sale may be in an adjacent neighborhood with dramatically different (lower) values.
So, even though the Comp and the subject property look similar on paper — which is how appraisers do things — they have very different price attributes.
Case Study: Fern Hill
Another, related appraisal flaw is failure to take into account micro-markets.
So, the Fern Hill neighborhood in St. Louis Park actually splits into two markets: the east half (closer to Cedar Lake) has bigger, older homes on larger lots.
The west half (closer to Highway 100) has newer, much more modest housing — and gets less per square foot.
So, what happens when one of the few small homes near Cedar Lake come on the market?
It invariably gets compared to the more modest homes to the west.
Willie Sutton famously remarked that he robbed banks because “that’s where the money is.”
The equivalent in real estate appraising is, “you get Comp’s where you can find them” — even if they’re flawed.
P.S.: the better solution?
Go further back in time to find another apple to compare to the subject “apple,” than use the change in local market prices since the last sale to interpolate the current value.