The Goldilocks Approach
As I’ve discussed in previous posts, the essence of pricing real estate is what’s called “bracketing.” (See, “Bracketing,” Explained“; and “Why the Neighbor’s House Usually Isn’t a Comp“).
Translation: you need to find a home that’s just above the home you’re trying to price (called the “subject property”) and one that’s just below.
In fact, you need to do that twice: once before you adjust for differences between the homes, and again after.
Bracketing Subtleties
So far, so good.
But in my experience, the key to bracketing — and in particular, to a home that’s under contract successfully appraising — is selecting the lower-valued home.
So, assume that the subject home is under contract at $500k, and the less valuable comp sold for $475k.
If the $475k home is significantly worse than the subject home, the net effect is to drive up the value of the subject home (that’s how adjustments work).
Result?
The subject home is likely to appraise.
However, if the $475k home is just trivially worse than the subject home, the effect is to pull down the value of the latter, jeopardizing the appraisal (and home sale).
The bottom line?
Establishing a good floor under the value of the subject home is critical.
Got all that?
