For sellers to come up with an accurate listing price and buyers to determine an appropriate offer price, “comparables” need to be a part of the real estate process. These “comps” are essential for determining a home’s market value, and without them, coming up with a listing or offer price would be like shooting in the dark.
So, what exactly are comparables, and how do they work in the world of real estate?
Comparables – Defined
Comparables – or “comps” as they’re commonly referred to – are simply other properties of similar size, style, condition, and location that have recently sold. They’re extremely helpful tools in determining an accurate listing price according to the current market, and they also help identify a solid offer price for buyers.
Real estate agents and appraisers pull a report of comparables in the area and carefully analyze them as part of their process of determining the value of a subject property.
Comparing Apples to Apples
The comps that are chosen for comparison purposes need to be as similar to the subject property as possible. Of course, not every house on the block will be identical, but there’s no sense in trying to compare the value of a 2-bedroom bungalow with a 4-bedroom, 2-story home, for example. These two types of properties are very different and would, therefore, be very difficult to compare against.
Location. The comps chosen will start with those that are located in the same neighborhood within a certain radius. Obviously, location matters when it comes to real estate, and proximity to the subject property is an important factor of comparables.
However, where each comp is located in the neighborhood compared to the subject property needs to be carefully assessed. For instance, a comp might not be a good reference point if both properties are located on opposite ends of the neighborhood. One property might back onto greenspace while another might be adjacent to a busy street, for instance. Exactly where each house is positioned in the neighborhood makes a difference and should be carefully considered.
House size. Generally speaking, the bigger the home, the more expensive it will be for obvious reasons. Ideally, the comps will be as close in square footage as possible in order to make comparison a lot easier.
Lot size. Not only does the size of the house matter, so does the size of the lot it sits on. Like the home itself, a bigger lot will generally be considered more valuable. It would be hard to compare a home on a 12,000 square foot lot to another with a property on a 3,000 square foot lot. The precise size of the land parallels the price, so when comparing a home with others, it’s important to stay within close range.
Having said that, the layout of the lot comes into play as well. For instance, a lot that’s heavily sloped and bare might not be valued as highly as a flat lot of similar size with plenty of mature trees on it.
Number of bedrooms and bathrooms. If the subject property has 3 bedrooms and 2 bathrooms, the comps should ideally have the same number. How many bedrooms and bathrooms the home has and how they’re positioned in the home can have a significant impact on price.
Age. Some might believe that a newer home might be valued higher than an older home, but that’s not always the case. Having said that, it’s much easier to compare homes of similar age to each other, which is typically around the 5-year range.
Condition. Two homes can be the exact same age, but the condition of each plays a key role in determining value. A home that’s in immaculate condition will generally be valued higher than a fixer-upper.
Amenities. The perks of a home play a role in determining value, but not all amenities will necessarily affect value in a positive way. While things like walk-in closets and heated floors might be seen as valuable upgrades, any over-improvements can drag the value of a home down if the surrounding neighborhood doesn’t call for such amenities.
Date of sale. This is a subject of debate, but comps shouldn’t have been sold any further back than three months or so – six months at the very max. Obviously, the more recent the sale, the better for comparison purposes as the housing market can change from one day to the next.
The Bottom Line
Comparables are an integral component of the real estate process and are really the best tool to use when it comes to determining an appropriate listing or offer price. They provide valuable information about similar homes in the area that have recently sold and provide the foundation for the preparation of a Comparative Market Analysis (CMA). You can really learn a lot from comps and how other properties compare to yours. Such information is crucial regardless if you’re a buyer or seller.