Do comps need to be within a one-mile radius?

Do appraisers need to use comps within a one-mile radius of the property they are appraising? That’s a good question. Many times underwriting guidelines of various lenders mandate that the appraiser MUST use comps located within a mile of the subject property.

I was thinking about this today after a conversation I had with a Realtor in Sacramento about his renovated listing that is pending far higher than anything else in the immediate neighborhood. His suggestion was that the appraiser for his deal should use comps North of the immediate neighborhood, while ignoring the most recent sales on surrounding streets. I know, this sounds heinous, but there is actually some validity to his case because the neighborhood to the North is competitive to the subject neighborhood, and only big-time fixers have sold recently on surrounding streets to the subject.

What does Fannie Mae say? The Fannie Mae Seller’s Guide (PDF) addresses the importance of selecting a minimum of three truly comparable properties in an appraisal report, but there is no mention anywhere of a “one mile radius” standard. The Fannie Mae Seller’s Guide is 1,126 pages, so if you are interested in researching more about comp selection, start at page 477 and scan through 5-10 pages. Fannie Mae basically says that the appraiser needs to use the best available similar properties for comparison, and that comps from competing neighborhoods can be used too (but the appraiser must explain why he/she went out of the immediate neighborhood to utilize “comps” from a different neighborhood – there better be a good reason).

Ultimately lenders have set up their own “one-mile” guideline. Many underwriters mandate that an appraiser is to stay within a one-mile radius of the subject property when in a suburban setting and then a five-mile radius when in a rural area. That’s fine as long as the best available comparables are truly located within those parameters, and if the lender can be understanding why this rule does not work out in every case too. In an ideal world, there will be three recent model match sales within a 1/4 mile of the subject property. But anyone in the housing industry knows how rare that is – especially in today’s market. 

I can see the value of a “one mile” guideline from a lender’s standpoint because they want to make sure that an appraiser is not cherry-picking comps from a far superior neighborhood to justify an inflated value in a neighborhood where properties sell for astronomically less. For example, when looking at the map above, an appraiser probably shouldn’t be selecting “comps” from Curtis Park or Land Park when appraising in Oak Park - unless there is a sincerely good reason to do so of course.

Let me know if you have any questions. 916-595-3735.

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