How comparable sales are chosen and adjusted

Start with closed sales

A sale price is the one number a buyer and a seller both agreed to, and usually a lender tested. That is why appraisers and agents build value from closed sales. Fannie Mae’s appraisal rules call for at least three closed comparable sales, generally closed within the last 12 months. An older sale may be used if it is the best match, with a time adjustment and an explanation.

Location comes first. Fannie Mae expects comparables from the same neighborhood, or for a condo the same project, where possible, and an explanation for any sale from a competing area. Each comparable’s distance from the subject is stated in miles with a direction, so you can see how far the appraiser had to go.

In practice we start narrow and widen only as needed: the same building for a condo, then the same neighborhood, the same type and a similar size, then condition and floor, then how recent the sale is. A sale six months ago in the same building often tells you more than one last month across town.

Size: measure the same way

Fannie Mae requires appraisers to measure single-family homes, including townhouses and rowhouses, under the ANSI Z765-2021 standard. A level with any part below grade counts as below-grade area. It is reported and adjusted separately and is not part of above-grade gross living area, even when it is finished or has a walk-out door. An apartment-style unit in a condo or co-op building is measured differently, using interior perimeter measurements. A townhouse held as a condo is still a single-family dwelling under the ANSI rule.

Listing square footage may come from the seller, an old floor plan or the assessor, each measured its own way. Before comparing two homes on size, find out where each figure came from. A finished basement adds usable space and value, but compare it with other finished basements rather than adding it to the main living area.

Adjusting for the differences

No comparable matches exactly, so each difference is adjusted toward the home being valued. If a comparable has a parking space the subject lacks, its price is adjusted down; if it needs a kitchen the subject already has, its price is adjusted up. Fannie Mae looks for comparables with similar physical and legal characteristics, such as site, room count, finished area, style and condition, and asks appraisers to consider FEMA flood zones.

Condition is rated on a fixed scale from C1, new and never occupied, to C6, with substantial damage or deferred maintenance. A well-kept home in its first cycle of replacing short-lived components such as appliances, floors and heating equipment is typically C3; a home with obvious deferred maintenance that needs some significant repairs is C5. Effective age can be younger or older than the year built suggests.

Buyers here price several features separately. The table lists the common ones and the mistake each invites.

Sold, pending, active, and listings that did not sell

Sold listings are the evidence of value. Pending sales show where the market is heading, but the price is usually not public until the sale closes. Fannie Mae allows contract offerings and current listings as supporting data only, alongside closed sales.

Active listings are the competition. They show what buyers are comparing a home with this week, and what sellers hope to get. An asking price is not a value; a listing that sits while similar homes go under agreement is telling you its price is too high.

Listings that expired or were withdrawn show where buyers said no. For the recent sales, compare the list price with the sale price and the days on market: the gap shows how much room buyers had. Avoid anchoring on any single asking price, including the one on the home you are pricing.

The price-per-square-foot trap

Dividing price by square feet is useful only within a tight set: the same building or block, the same type, a similar size, measured the same way. Outside that set it misleads in predictable ways.

Use price per square foot to spot outliers, then go back to the individual sales.

• Smaller homes usually sell for more per square foot than larger ones nearby, because kitchens, baths and land cost about the same whatever the size.
• Condos and houses do not compare per square foot: land, responsibility for the exterior and condo fees all differ.
• The figure jumps if one listing counts basement or attic space and another does not.
• A parking space or a large private deck carries value that square feet do not capture.
• In a small sample, one unusual sale moves the average a lot.

Reading a CMA or appraisal you are given

If most of the support comes from one sale, or from sales that needed large adjustments, read the conclusion as a wider range. For a two- to four-family, expect fewer sales and a wider search, with rents and the gross rent multiplier as a cross-check; see our condo and multifamily guide.

• Count the closed sales and check their dates.
• Check the distance and that each is the same type of property.
• Confirm the size figures were measured the same way.
• Look at each adjustment and ask why it was made and how large it is.
• Ask what the active and pending listings suggest about direction.