Before an appraiser can use home sales as comparables, the sale must be verified. The sales are analyzed to determine if they are "arm’s length" transactions. An arm’s length transaction is defined as “a transaction between unrelated parties under no duress. There are multiple reasons for a home to sell under duress. These reasons include, but are not limited to: foreclosure, short sales, estate sales, job transfer, divorce, etc. Because duress sales typically don’t sell for market value, these sales are removed from the analysis.
The appraiser makes adjustments to the sale prices of the comparable properties for different variables such as location, size, quality, condition, amenities, etc. Appraisers generally use a Paired Sales Analysis to determine market differences for different features.
Below is an example of a Paired Sale
|Home "A"||Home "B"|
|1,000 Sq. Ft.||1,000 Sq. Ft.|
|2 Car Garage||2 Car Garage|
|Full-Finished Basement||Full-Finished Basement|
|2 Bedroom 2 Bathroom||2 Bedroom 2 Bathroom|
|1 Fireplace||No Fireplace|
|Sold 1/10/2010||Sold 1/12/2010|
|Sold Price $100,000||Sold Price $98,500|
There is a $1,500 difference in sales price. The only difference between the two homes is that Home "B" does not have a fireplace. The $1,500 shows that, all things the same, a buyer is willing to pay $1,500 more for a fireplace.