Home appraisers make a variety of adjustments to most appraisals to arrive at a property's fair market value (FMV). They usually try to avoid making location adjustments because of the difficulty in setting proper values. When location adjustment appraisals must be done, appraisers try to select very similar properties, needing few other adjustments, to arrive at a reasonable FMV. During a down real estate market, with fewer home sales, houses tend to require more location adjustment appraisals.
Make Location Adjustment Appraisals
Find at least three comparable homes recently sold (within six months) in the same neighborhood as the subject property, the home that is the subject of the appraisal. If the appraiser must go outside of the immediate neighborhood, the new location should be as similar as possible to the location of the subject property.
Select a location that is both geographically and perceptually similar to the subject property's neighborhood. For example, a neighborhood over a few miles away and populated with $300,000 homes, when the subject property contains mostly properties in the $200,000 FMV range is probably unacceptable because of the dissimilarity in property values. Quality and desirability of neighborhoods can vary widely even if they abut each other. Use physically similar locations to make the best location adjustments.
Compare physically similar homes in different locations to minimize living area and amenity adjustments. Comparing a townhouse condominium in suburbia with a high-rise beachfront property is equally problematic. However, comparing a three-bedroom, seven-room colonial-style home in a similar neighborhood to an almost identical subject property should be meaningful. Appraisers typically use the term "similar market area" to identify a comparable neighborhood to keep location adjustments to a minimum amount. In most cases, physical or location adjustments should amount to 10 percent or less of the subject property's FMV to avoid evaluator questions.
Estimate the difference in value of the new location. The additional location may include better or worse amenities or views (e.g., mountains, water, commercial properties or highways) that mandate a positive or negative adjustment to its selling price. For example, a subject property may have a selling price of $220,000, while the comparable in a similar neighborhood sold for $240,000. However the comparable may have a view of a majestic mountain or have an outstanding elementary school just a few blocks away. The appraiser might make a location adjustment of minus $20,000 to the comparable to reduce its value to better support the subject property FMV.
Use only one or two (maximum) comparables in locations outside of the subject property neighborhood. In condominium developments, try to use at least two recent sales from the same project, with a third in a similar development in an aesthetically equal location.
Do not fail to justify the location adjustment as a comparable. Take nothing for granted as the reader/evaluator may not be familiar with either the subject property or comparable location. Do not compare a home in a different location that also is physically different.
- Use only one or two (maximum) comparables in locations outside of the subject property neighborhood.
- In condominium developments, try to use at least two recent sales from the same project, with a third in a similar development in an aesthetically equal location.
- Do not fail to justify the location adjustment as a comparable. Take nothing for granted as the reader/evaluator may not be familiar with either the subject property or comparable location.
- Do not compare a home in a different location that also is physically different.