Real estate professionals often use the term “comps” to refer to comparable properties that have sold. Comps are used to compare similar properties and what they sold for to determine what another property is worth.
Comps are important to buyers to consider when making an offer to be sure they are not paying too much.
Comps are important to sellers to be sure a listing is priced competitively so the property doesn’t sit on the market unsold, and end up as a “stale” listing that no one buys. Overpricing upfront often results in a lower priced sale after sitting on the market than if a house or land is priced right from the beginning.
The actual value of any property is determined by what a buyer agrees to pay and a seller agrees to accept.
How Does a Property Become a Comp?
Once a closing occurs, the sales price is a public record and used to determine values when an agent is doing a Comparative Market Analysis (CMA) for a buyer or seller client. So any recent sales are comps for future sales.
Sometimes real estate professionals refer to Market Comps and Off-Market Comps. That simply means whether the sale resulted from being marketed to the public via the MLS (Multiple Listing Service) or whether it was privately handled sale between a buyer and seller.
How are the Best Comps Selected?
The best comps are located in the same area, ideally the same neighborhood or within a few miles, and in the same county or city or school district.
Comps should be as similar of a style home as possible. So a ranch comp is used to value ranch homes, a 2-story is best to compare to other 2-stories.
Comps should be a similar size in “above grade” square footage, bedrooms and baths. Above grade means the main entry level of a home and any heated and cooled square footage from that point and above. It doesn’t include finished space in a basement because that has less value than above grade space.
A home in similar condition and of a similar age is the most accurate comp. Condition can include overall upgrades and finishes as well as how well maintained a home is.
Features that are comparable, like a house with a finished basement is the best comp for another house with a finished basement. A property equipped for equestrian use is best compared to other similar properties with a barn, fencing, riding ring, etc.
Lots should have similar features such as acreage or lot size, topography, view, and frontage on a lake, creek or golf course.
Finally, it is important the comps selected are the most recent sales possible. Ideally comps should have sold within 3 months, but 6 months is generally acceptable. If no other comps are available within 6 months, it is acceptable in those cases to go back up to 12 months.
How Are Comps Compared to a Subject Property?
Once the best matches are chosen as comps, they are compared to the “subject” property which is the property a seller wants to list or a buyer wants to buy. Doing a Comparative Market Analysis also called a CMA helps clients understand the value of their property versus other similar homes.
Adjustments for square footage and acreage are marginal adjustments. They are not made at the cost per square foot to build a new house or the cost per acre to buy raw land. The purpose of a CMA (as well as an appraisal) is to arrive at an adjusted value of a property. If properties are already very similar, the adjustments are just small amounts to account for differences. So it may be a $25-$35 a square foot adjustment to compare differences whereas the cost to build a new home may be $100-$150 a square foot.
Adjustments are made to past sales to compensate for differences in features, condition, square footage, etc. After these adjustments, the agent will determine an Adjusted Value of the subject property for the purpose of a seller listing a property or a buyer making an offer on a property.
Is this Analysis of Comparable Sales an Art or a Science?
It is a little of both! It is important to have years of experience to accurately assess a property’s value, to understand the different value of features, and to know what is driving the current real estate market values.
Unfortunately, too many agents simply run average prices for area sales, and use that to determine a subject property’s value which is taking a huge shortcut. That shortcut often short changes the client!