When it comes to real estate investment, there are so many considerations and factors to help you decide the amount you could offer for buying a property, or how to accurately price a property you are trying to sell. Many of these moving parts are highly dependent on several factors and one of the ways you can gauge these is through reviewing comps.
What are real estate comps?
Comps is short for “comparables” or “closed comparable sales”. These are the properties that are comparable to the one you are targeting to buy or to sell. Comps are used to determine the value for which a property can be sold based on similar properties that have already been previously sold in the same neighborhood or in an area as close as possible to the home being valued.
Comps consider properties that are already completed sales and not just any similar property that is still actively being sold in the market. As a completed home sale, it signifies that there is already an agreement that occurred between a seller and a buyer to purchase a similar property as the one you have in mind. This sets a precedent to succeeding sales and purchase activity in the area.
Still, it does not hurt to check out the competition by viewing active properties in the area, or much better, to physically visit them. Though do keep in mind that active listings may be overpriced and will later on settle for a much lower price or it may be well below market price to drum up multiple offers.
The completed sale of the comps has to take place within the specific area or nearby that your property in mind is located and the homes should be similar in characteristics (square footage, number of bedrooms, property condition, features, walkability, proximity to important places, school district, tax status) to the property you are considering to buy or sell. We will discuss these in detail later.
How are real estate comps used?
Real estate comps are widely used in a variety of ways by home buyers, sellers, realtors, appraisers, and lenders.
Real estate comps as used by homebuyers
Home buyers use comps to decide the fair price to offer for a property. Prudent home buyers would double check the price of a house they are interested in versus comparable properties to ensure it is appropriately priced for the current market.
Real estate comps as used by sellers
For home sellers, comps are necessary to help them determine the appropriate listing price for the property they are looking to sell. Even when you are selling with the help of a real estate agent, it is always important to be familiar with comps so you can ensure the property is being sold at the price point that you are comfortable with.
Real estate comps as used by appraisers
Appraisers rely on comps and source out their own comps data for an accurate assessment of a property’s value. Appraisers may be required by the buyer’s lender prior to closing or sellers may also enlist the help of appraisers to accurately determine the value of their property.
Real estate comps as used by real estate agents
Real estate agents research comps to sell a property in a fair market value that is agreeable to the seller and to prospective buyers.
Real estate comps as used by lenders
Lenders also use comps as part of its assessment to establish the terms of a home loan. Using valuations under the local market and in the present economy, lenders will assess whether the price for which the property is being sold is appropriate in the current local market. This will ensure the loan being taken out reflects the right value of the property that the borrower is looking to purchase.
How to find real estate comps
Real estate agents and MLS
Finding comps in this day and age is so much easier given all the available resources and data that technology can supply. The easiest route is, of course, to enlist the help of a reputable realtor or real estate agent. Agents have access to local Multiple Listing Services (MLS) which is the most accurate source of comprehensive data on recent sales and selling price of properties on the market.
You can make use of agent directories such as ZIllow to find a real estate agent who is adept in navigating MLS and can help you find appropriate comps. They can also provide additional valuable insights in terms of market trends and home value appreciation.
Real Estate Listing Sites
Public Property Records
County records can provide you with the sale price on specific comparable properties but as some counties do not have this information online, you may need to drive to the courthouse to check it. Bear in mind that public property records reflect the final price, not the original asking price in cases wherein the seller had to make concessions on the pricing.
What to consider in real estate comps
A good rule for finding comps is to find three or more similar properties so you can be sure that it is an acceptable pricing and the property is not just an outlier in the market. Here are some of the most important criteria to consider when looking at possible comps.
1. Location
Location is the most important factor you need to look into. Ideally, you should only check within half a mile up to a mile from the property you plan to sell or buy unless the area is a rural one. For more dense neighborhoods, a quarter to half mile would be better, and for subdivisions, the subdivision itself would provide a good border to your search.
Be careful not to include sold properties in the area that are across a major highway. Even though it is within a mile from your property, it may already be in a better developed area or have a better school zone.
2. Square Footage
A good rule of thumb on square footage is to keep the comps within 10% of your target property’s square footage.
3. Number of rooms
Only include properties with the same number of bedrooms and bathrooms as yours. Though some properties may have the same square footage, the difference in the number of bedrooms would not compare, such as one with a huge single bedroom versus a house with several small bedrooms.
4. Price per square foot
Compare the price per square foot of your target property and the comps by dividing the comps’ sale price by its square footage.
5. Age of the house
Houses with more or less the same age will provide accurate comps because the major systems such as plumbing, HVAC, and roofing will be in a similar condition.
6. Condition
The home’s condition is critical to its value since a well-maintained and recently renovated property cannot be sold at the same value as one in a dilapidated state. Consider the condition of all parts of the property including renovations, interiors, and features when looking at comps.
7. Nearby Places
Comps should be places with similar nearby amenities such as shopping or retail, schools, as well as access to transportation and walkability to these places.
Final Word
Though real estate comps can be tricky and time-consuming, it pays to do this properly as it is an important part of the buying and selling process. Always remember to be unbiased as possible when selecting comps. Put aside any attachment to any property and use your discernment to make use of comps in the most accurate way possible.
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