On Comparable Sales

This short article raises issues related to what constitutes or defines a comparable sale. While it may seem arrogant to take on a topic of this import, it is necessary, since there is not currently a formal definition. There are descriptions of what a comparable sale is.  But there is no formal, universally recognized  definition¹. However, does there need to be? Do we have enough technical information to understand the concept of a comparable sale? This article suggests the descriptions are sufficient.

It is common for the GSEs to criticize appraisers’ poor choice of comps. Under some conditions, the GSEs’ have the justification to level these critiques. Yet, given the wealth of descriptions there are in the available literature about what constitutes a comparable sale, why do appraisers ignore those descriptions to their own peril?

Fannie Mae’s Selling Guide (p. 569 of the 11/6/2024 edition) describes comparable sales as those properties that “…should have similar physical and legal characteristics when compared to the subject property. These characteristics include, but are not limited to, site, room count, gross living area, style, and condition” (italics added). Use of the conditional should recognizes an exact model match between the subject and the comps is the ideal, but not what may be common.  

If the GSEs’ methodology of choosing comps is no more scientific or formal than ours is, what makes theirs worthy of veneration but ours worthy of denigration? Is it, perhaps, that the GSEs are consistent with their own description of a comparable sale but, since we are not properly familiar with it, we are not?

Again, there is no formal, universally accepted definition of a comparable sale. However, this article has indicated there are valid descriptions of what constitutes a comparable sale. Therefore, the next part of this article is devoted to that issue, with the latter portion dedicated to a summary of the issues, and then a call to action.

All of the following references come from the 15th ed. of The Appraisal of Real Estate (bibliographic citation omitted), with the pages as shown. Consider p. 107, where that authoritative source declares, “…a good comparable sale is a competitive alternative – i.e., a property that the buyer of the subject would also consider [purchasing]” (italics added). In light of this description, consider two houses, literally across the street from each other. House-A is a 4,500 square-foot, two-story Moorish-style McMansion with killer southeast views and 100 linear feet on a recreational lake. House-B is, well, not all that. Despite the fact they are directly across the street from each other (they are not even in the same neighborhood, but that distinction is the thesis of another article), they are not comparable since neither is a competitive alternative for the other. They do not meet the description of a comparable sale.

Then, on p. 338 is this advice. “Regardless of how physically similar a potentially comparable site is to the subject site, the most comparable sales would have the same or a similar highest and best use” (italics added). Granted, this quote is in the context of a comparison of one site with another. But is not the part a part of the overall property?  

Let’s shift sources.  Ratterman² (p. 17) does not hesitate when he teaches that “[c]omparable sales should have the same highest and best use as the subject property” (italics added).  In another text, Ratterman³ stakes the claim that “[i]n the valuation of land, the comparable sales must have the same highest and best us as the subject” (italics added). (Between the 15th ed. and Ratterman’s two books, there are at least 12 citations with essentially these same conclusions. There is no reason to cite them all here.)

On the topic of comparable sales, the above are a precis of descriptions from authoritative sources. These make it clear that while there may be no formal, universally accepted definition of a comparable sale, the best description of one is a real property sale that has the same highest and best use of the subject. And this puts the lie to those who advocate that a highest and best use analysis is a waste of time as a component of the typical single family residential real estate appraisal. How so? Simple. Given this description, how can the appraiser choose comps if the appraiser does not first know the subject’s highest and best use? In other words, all other things being equal, how and why are appraisers concluding a 2,500 square foot, two-story house comparable to a 1,200 square foot ranch-style house? Even with merely a description such as the above, rather than a definition, these two dwellings are simply not substitutes one for another.

What is the call to action? It is likely the GSEs have transitioned to desktop appraisals, AVMs, evaluations, BPOs, and appraisal waivers, at least in part, because they concluded we appraisers were not doing our jobs.  When one of the two biggest complaints against appraisers (from the GSEs anyway) is the appraisers’ poor choice of comps, then it’s safe to conclude we are not doing our jobs. We are choosing comps from the imperative of convenience, not the imperative of analysis. Therefore, let us speak well for ourselves! Let’s learn now how to choose comps. If anything will kill real estate appraisal, it is our own complacency and ignorance.

¹The Dictionary of Real Estate Appraisal, 6th ed. references the term comparable sale 17 times but does not define the term.

²Ratterman, M. R. (2022). Residential Market Analysis and Highest and Best Use. Chicago: The Appraisal Institute. doi:https://lccn.loc.gov.202225654

³Mark R. Ratterman, M. S. (2020). Residential Property Appraisal. Chicago: The Appraisal Institute.