Understanding the Cornerstone of Real Estate: What are Real Estate Comps?

Real estate comps, short for real estate comparables, are recently sold properties that share similar characteristics with a subject property – the property you’re trying to value. They are the bedrock of accurate property valuation, serving as the primary tool for real estate agents, appraisers, and investors to determine a fair market price. Think of them as the “evidence” you present to support your opinion of value, based on what similar properties have actually sold for in the recent past.

The Power of Similarity: Finding Meaningful Comps

The key to using comps effectively lies in their similarity to the subject property. We’re not talking about simply being in the same zip code; we need a much finer level of granularity. Key characteristics to consider when selecting comps include:

• Location: Ideally, comps should be within a small radius of the subject property. A general rule of thumb is to look within a quarter-mile in dense urban areas and up to a mile or more in rural areas, but this also depends on the homogeneity of the neighborhood.
• Property Type: A single-family home should be compared to other single-family homes, a condo to other condos, and so on. Mixing property types will skew the results.
• Size and Features: The number of bedrooms and bathrooms, square footage, lot size, and presence of features like a garage, pool, or finished basement all significantly impact value.
• Age and Condition: Newer homes generally command higher prices than older ones, and properties in excellent condition will be worth more than those needing significant repairs.
• Sale Date: The closer the sale date is to the present, the more relevant the comp will be. Markets fluctuate, so a sale from six months ago is generally more reliable than one from two years ago.

The more closely a comparable property mirrors the subject property, the more weight it carries in determining the subject’s value.

Where to Find Reliable Comps

Several sources can provide data on recently sold properties:

• Multiple Listing Service (MLS): The MLS is the most comprehensive and reliable source of comps, as it contains detailed information about almost all properties listed for sale. However, access to the MLS is typically limited to licensed real estate agents.
• Public Records: County assessor websites often provide information on property sales, including sale prices and property characteristics. While useful, this data may not be as detailed as what’s available on the MLS.
• Online Real Estate Portals: Websites like Zillow, Redfin, and Realtor.com offer some sales data, but the information may not always be accurate or complete. Use these sources with caution.
• Real Estate Agents: The easiest way to access reliable and professional comps is to contact a trusted real estate agent and have them provide the comparables for you.

Adjustments: Fine-Tuning the Value

Even the best comps are rarely perfect matches. Therefore, appraisers and experienced agents make adjustments to the sale prices of the comps to account for any differences between them and the subject property.

For example, if a comp has a two-car garage and the subject property only has a one-car garage, the price of the comp is adjusted downwards to reflect the superior feature. Adjustments are typically made based on market data and experience. The goal is to arrive at an adjusted sale price that reflects what the comp would have sold for if it were identical to the subject property.

Limitations of Comps: Knowing What They Can’t Tell You

While comps are invaluable, they have limitations:

• Market Fluctuations: A rapidly changing market can render older comps less reliable.
• Unique Properties: Properties with unique features or in unusual locations may be difficult to comp accurately.
• Subjectivity: The selection and adjustment of comps involve some degree of subjectivity. Different appraisers or agents may arrive at slightly different valuations.

Therefore, it’s important to use comps as one piece of information among many, rather than relying on them exclusively.

Frequently Asked Questions (FAQs)

1. How many comps do I need for an accurate valuation?

Ideally, you should aim for at least three to five good comps. This provides a solid basis for comparison and helps to average out any outliers.

2. What is the ideal timeframe for comps?

Generally, comps within the last three to six months are considered the most reliable. In a stable market, you might stretch this to a year, but in a rapidly changing market, you should focus on more recent sales.

3. Can I use properties that are currently listed for sale as comps?

No. Only sold properties can be used as comps. Listing prices reflect the seller’s asking price, not the actual market value.

4. How do I adjust for differences in square footage?

A common method is to determine a price per square foot based on the comps and apply that to the difference in square footage between the comp and the subject property. For instance, if comps are selling for $200 per square foot and the subject property is 100 square feet smaller than the comp, you would adjust the comp’s price downwards by $20,000.

5. What if there are no recent sales in my area?

If there are no recent sales within your desired radius, you may need to expand your search area or timeframe. You can also consider using properties with similar features in nearby neighborhoods.

6. How important is the “days on market” (DOM) of a comparable property?

Days on market can be a useful indicator of a property’s appeal. A property that sold quickly may have been priced attractively, while one that lingered on the market may have been overpriced or had issues. This information can influence how you weigh the comp.

7. What are “distressed sales” and should I use them as comps?

Distressed sales, such as foreclosures or short sales, often sell for below-market prices. While they can provide some insight, they shouldn’t be used as primary comps unless the subject property is also distressed. It is best to consider a few of these and note them in your assessment.

8. How do I handle adjustments for renovations or upgrades?

Adjustments for renovations depend on the scope and quality of the upgrades. A minor cosmetic upgrade will warrant a smaller adjustment than a full kitchen remodel. Research recent sales of similar properties with and without the upgrade to determine an appropriate adjustment amount.

9. What is the difference between an appraisal and a comparative market analysis (CMA)?

An appraisal is a formal valuation performed by a licensed appraiser, while a CMA (Comparative Market Analysis) is an informal valuation performed by a real estate agent. Appraisals are required for mortgage lending, while CMAs are used to help sellers price their homes and buyers make offers.

10. Can I use comps to negotiate a lower price on a property I want to buy?

Absolutely! Presenting solid comp data to the seller can strengthen your negotiating position and justify your offer price. Always be professional and respectful in your presentation.

11. How do I account for the condition of the property?

Condition is crucial. Note any significant differences in condition between the comps and the subject property. Factors like needed repairs, outdated features, or recent renovations all impact value. Thorough inspection reports and photographs can be highly valuable in making these assessments.

12. What role do real estate agents play in the comp process?

Real estate agents are invaluable resources in the comp process. They have access to the MLS, possess local market knowledge, and have experience in selecting and adjusting comps. Working with a skilled agent can significantly improve the accuracy of your valuation. Their expertise is worth the commission.

Understanding real estate comps is fundamental to navigating the market successfully. By carefully selecting and analyzing comparable properties, you can make informed decisions, negotiate effectively, and ensure that you’re paying or receiving a fair price. So dive in, do your research, and harness the power of comps!