If you are out there in a free market to purchase or sell your house, you will likely hear the term “comps” or comparables used more than once. Comparables are usually a topic of great debate between real estate agents, appraisers, loan underwriters, buyers, and sellers throughout the buying and selling process.
So… What Are Comps Exactly?
In order to know or at least evaluate the price of a property, real estate appraisers compare and evaluate recent sales and listings from within the market. However, this process is still a fuzzy one and can be highly debatable. What requirements make a sale worth considering as comparable? How large should the considered market area be? How far back in time can you go to find a sale? Do active or pending listings count as comps? All good questions, all with varying answers depending on the situation.
How Do Appraisers Select Comps?
One of the first aspects to consider is market area, or, the relative proximity of sale to the Subject property. Normally you would want a comparable property that is no further than half a mile from the subject property. However, this kind of standard can be rigid and lead to skewed data when dealing with larger neighborhoods, rural properties or unique properties. For example, a house could have sold right down the road from you but if it was built on a lot with a far superior view, such as a hillside panoramic, it could be less desirable as a comp. Likewise, adverse conditions such as busy freeways could make a comp less desirable – these would be used only in an absolute worst case scenario because their difference are extremely difficult to place a value on. How much more is someone willing to pay for a view? How much less for a busy road nearby? Hard to extrapolate.
The next filtering parameter that should be considered is the age of sale. A house that has been sold recently is a better representation of current market conditions that a sale that transpired 6+ months back. The best comps are usually 1-90 days old; however, if the market is really slow then you might not have the luxury of choosing a recently purchased home. This is common during late Fall and throughout Winter.
The next major filter will be the actual features of the properties themselves. Features such as, but not limited to, style, livable area square footage, zoning, lot size, etc. Ideally we are looking for comparables that are as identical to your Subject property as possible. If you have a condo two-one condo then your best comps are other two-one condos in the same complex.
How Do Appraisers Use Comparable Sales?
The Sales Comparison Approach is perhaps the most common approach utilized by appraisers. After identifying a set of comps, they then line them up and compare them with each other. They make adjustments along the grid based on the similarity in size, area, sale date, proximity and all other factors. After carefully analyzing these factors, they then make adjustments to the sales price of each comp to arrive at an “adjusted value”. These values are weighted and the most comparable properties, with the least required adjustments are favored as indicators of true value.