The sales comparison approach values a home by looking at what similar nearby properties recently sold for, then adjusting those sale prices up or down to account for the ways each one differs from the home being appraised. Lenders rely on it for most conventional mortgages because the value is grounded in actual transactions rather than theory. Three things decide whether the result holds up: how the comparable sales are chosen, how the adjustments are supported, and whether the subject property is bracketed by sales on both sides of its characteristics.
How Comparable Sales Are Selected
Fannie Mae requires at least three closed comparable sales on every appraisal that uses the sales comparison approach, and appraisers often add more when the data supports it.1Fannie Mae. Selling Guide – Comparable Sales A prior sale of the subject itself can count as a fourth comp, and current listings or pending contracts can appear as supporting data, but they do not replace closed sales.
Selection starts with proximity. Appraisers look for sales inside the subject’s market area, which Fannie Mae defines as the geographic region producing most of the demand and competition for that property.1Fannie Mae. Selling Guide – Comparable Sales In suburban and urban neighborhoods that usually means within roughly a mile. Sales from the same subdivision carry the most weight because they share school districts, zoning, and neighborhood influences. When a comp comes from a competing neighborhood, the report has to explain the choice and address any location differences.
Timing matters almost as much as distance. Sales from the prior six months are preferred because they reflect current market conditions. In slower markets, sales up to twelve months old are acceptable, provided the appraiser accounts for any price trends during that gap. The comps should also share basic characteristics with the subject: similar room count, finished living area, architectural style, and overall condition.1Fannie Mae. Selling Guide – Comparable Sales They do not need to be identical, but they should appeal to the same buyers who would also consider the subject.
Rural properties strain all of this. Large lot sizes and sparse development often mean no truly comparable recent sale sits nearby. Fannie Mae permits comps from a considerable distance away when they are the best indicators of value, as long as the appraiser explains the selection and the analysis still produces credible results.1Fannie Mae. Selling Guide – Comparable Sales The same flexibility applies in any market with limited sales activity.
Most of the data comes from the Multiple Listing Service, which captures sale price, concessions, days on market, and property details. Appraisers cross-reference that against public tax assessor records and county deed filings, especially for off-market sales that never appeared on the MLS. Each sale’s terms, financing, and concessions are then verified through MLS records or by contacting the listing or selling agent.
How Adjustments Work
Once the comps are chosen, the appraiser adjusts each one’s sale price to reflect what it would have sold for if it had matched the subject exactly. Adjustments always apply to the comparable, never to the subject. The direction is one-way logic: if the comp is better than the subject in some feature, value gets subtracted from the comp’s price; if the comp is worse, value gets added.
Take a subject with a two-car garage against a comp that sold with a three-car garage. The appraiser subtracts the estimated market value of that extra bay from the comp’s sale price. If the subject has a finished basement and the comp does not, value gets added to the comp. Each meaningful difference gets its own line on the appraisal grid: lot size, gross living area, bedroom and bathroom count, age, condition, basement finish, garage capacity, porches, pools, and other amenities.
The dollar amount behind each adjustment should come from market evidence rather than guesswork. The most reliable method is paired sales analysis, where the appraiser compares two sales that are nearly identical except for one feature. If two ranch homes in the same neighborhood sold a month apart and the only meaningful difference is a pool, the price gap isolates what the market pays for a pool in that area. The more pairs the appraiser can find, the more defensible the adjustment. Quality of adjustment support is often what decides whether a report survives underwriter review.
Adjusting for Financing and Seller Concessions
Not every sale happens on clean terms. When a seller pays part of the buyer’s closing costs, funds a rate buydown, or offers other incentives, those concessions can inflate the recorded sale price above what the property would have fetched otherwise. Fannie Mae requires appraisers to adjust comparables that include financing or seller concessions to strip out that inflation.2Fannie Mae. Selling Guide – Adjustments to Comparable Sales
The adjustment is not a dollar-for-dollar deduction equal to the concession. The appraiser estimates how much the concession actually pushed the price above normal market value, then subtracts that figure. A seller might contribute $8,000 toward closing costs, but if the market data shows the concession lifted the price by only $5,000 against similar sales without concessions, the adjustment is $5,000.2Fannie Mae. Selling Guide – Adjustments to Comparable Sales Positive adjustments for concessions are never permitted, because a concession can only inflate a price, not deflate it.
Freddie Mac takes the same position: adjustments should approximate the market’s reaction to the financing or concessions, not follow a mechanical formula.3Freddie Mac. Considering Financing and Sales Concessions: A Practical Guide for Appraisers That holds even where concessions are common in the local market.
Bracketing the Subject Property
Bracketing means picking comps that fall on both sides of the subject for key characteristics like size, age, condition, and sale price. If the subject is 2,000 square feet, the appraiser includes at least one comp that is larger and one that is smaller. This keeps the appraisal from leaning entirely on properties that are all superior or all inferior to the subject.1Fannie Mae. Selling Guide – Comparable Sales
The purpose is credibility. If every comp is bigger, newer, and nicer than the subject, the appraiser has only proven an upper bound. If every comp is inferior, the opposite problem shows up. Bracketing anchors the value with real transactions on both sides and reduces the risk that one-directional adjustments are doing too much of the work. Perfect bracketing across every feature at once is rare in practice. An appraiser might bracket square footage with one group of comps and sale price with another. The point is that the subject’s value is supported from multiple directions rather than extrapolated from one end.
How the Final Value Is Reconciled
After adjustments, each comparable produces an adjusted sale price: what that property would have sold for if it had been identical to the subject. The appraiser reconciles these numbers into a single opinion of value, reported on the Uniform Residential Appraisal Report (Form 1004).4Fannie Mae. Uniform Residential Appraisal Report
Reconciliation is not averaging. A straight mathematical average would treat a weak comp the same as a strong one. Instead, the appraiser weighs each comparable by how reliable its indicated value is. Comps that needed fewer or smaller adjustments usually get the most weight because they were already closer to the subject. A comp with a net adjustment of 3% is a stronger value indicator than one adjusted by 18%, even when the two land at similar numbers.
Qualitative factors also come in. Was one comp in the same subdivision? Did another sell under unusual circumstances that the concession adjustment might not fully capture? The final reconciled value reflects the appraiser’s judgment about which data points best represent where the subject sits in the market, and that number is what the lender uses to size the loan.
The Myth About 15% and 25% Adjustment Caps
A common belief in real estate circles is that Fannie Mae caps net adjustments at 15% and gross adjustments at 25% of a comparable’s sale price. Many lenders impose those thresholds in their own underwriting overlays, which is probably where the idea took hold. Fannie Mae itself has no specific limitations or guidelines on net or gross adjustment percentages, and the size or number of dollar adjustments alone cannot be the reason a comparable is rejected.2Fannie Mae. Selling Guide – Adjustments to Comparable Sales
Reality is more nuanced. Fannie Mae expects market-based adjustments without arbitrary caps, but when adjustments grow large enough to suggest the property does not conform to its neighborhood, the underwriter has to decide whether the value opinion is still adequately supported. Comps needing modest total adjustments carry more weight in reconciliation because they started closer to the subject. A comp that needs $60,000 in adjustments on a $300,000 sale is technically permissible, but an underwriter will question whether that sale really belonged in the analysis.
When the Appraised Value Comes In Low
A low appraisal creates an immediate problem because lenders base the loan on the appraised value, not the contract price. Agree to buy at $350,000, see the appraisal come back at $330,000, and the lender will finance only the lower figure. You are short $20,000 unless something changes.
Buyers with an appraisal contingency in their purchase contract have the cleanest exit. The contingency lets you cancel the deal and recover your earnest money if the appraisal falls below the purchase price. Walking away is not the only option. You can renegotiate the price down to the appraised value, bring additional cash to cover the gap, or split the difference with the seller.
If you believe the appraisal missed something, federal interagency guidance recognizes a formal process called a Reconsideration of Value. An ROV is a request from the lender to the appraiser to reassess the report based on potential deficiencies or new information that could affect the value conclusion.5Federal Register. Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations You do not contact the appraiser directly. You give the evidence to the lender, who routes it to the appraiser.
The evidence needs to be specific and verifiable. Useful submissions include comparable sales the appraiser did not consider, corrections to property characteristics reported inaccurately, or other factual information about the property that could affect value.5Federal Register. Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations Saying “I think it should be higher” accomplishes nothing. Pointing out that the appraiser used a comp from a different school district when a closer sale from the same district exists gives the appraiser something concrete to evaluate. If the complaint includes allegations of discrimination, the lender may separately initiate a fair lending review alongside the ROV.