What Makes a Good “Comp?”

That’s right, twins. A Good Comp is a twin house to the subject property. They are so similar, it would be hard for most people to tell them apart. The biggest problem in pricing homes, is the selection of the best “comps.” Proximity does NOT mean Comparability! That’s what Automated Valuation Models do; and it is NOT the best way to find comparable sales or determine market value. Comparing houses built in 1930, 1960, 1995, 2006, and new construction is NOT the way to determine a home’s current market value. Comparing a two bedroom with one bath, to a five bedroom with a full basement (and a golf view) is not a fair comparison; yet they may be located on the same street. To a computer program, they are perfect “comps.” Just one reason why computers can never replace people in pricing real estate. Things like circumstances and condition will never be available to a computer.

The theory of “paired sales” work great; well in theory. And, in some markets (where the same builder has built the same floor plan over and over again) paired sales are available and help to prove specific amenity values (i.e. same house built – one with 2 car garage and one with 3 car garage – difference in sales price?). However, paired sales are much more difficult in some markets and learning values of certain items takes years of experience, thousands of files from homes in the area, and the experience to read and interpret all that data.

10 tips for better comps

Lets talk about creating a CMA. Like most things in the real estate business, it depends. You may work in a market where you have 50 sales within the last three months and a one mile radius, or you may work in a market that has only one sales in the last 6 months, in a 50 mile radius. Choosing comparable sales is easy when you have a hundred sales in the same S/D. However, the art comes in when the selection is a little less plentiful.

What should you look for in a comparable? What makes a comp a good comp. Not like an AVM where the distance from the subject property is the main criteria.

1. Within 200sqft, less if possible. Always uses one comp with smaller SF than the subject and one larger.

2. Age with five years, less if possible. Newer 1-3 must be compared with similar age.

3. Most similar style (ranch to ranch/two story to two story, split level to split level) and bed/bath count. If a four bedroom or a two bedroom, the comps (at least 2) should have the same count.

4. Basement homes must be compared with other basement homes. Finished SqFt must be on the same level to be properly compared. MLS must show a separate of finished sqft by level or comparisons cannot be accurate.

5. Do NOT take the sqft from the local tax department to create a CMA. Either for listing or offer price. With today’s prices, small errors can cost someone big bucks.

6. Special features? Homes with items such as a pool, attached and a detached garage, guest houses, studios/workshops over the garage, etc. At least one comp must have the same feature.

7. Quality-apples to apples. Can’t have a subject property of a 1984 wood sided ranch and compare it to the 2 story, brick with tile and hardwoods that just sold in the neighborhood. Proximity does not always equal comparability. Sometimes the closets sale is not the best comp.

8. Lot value may not be as important as location value. What’s the difference? If the exact same house is built in two locations, one is water front and the other is just an interior lot with a view of other homes, that can make a great comp. It only requires one adjustment. Even if the adjustment is a large percentage, it is still a good comparable. Location appeal is a different animal. A home located one block from a deserted downtown area, even if it is the exact same design, is not a fair comparison to a home located in a country club area a mile away. Location or market appeal basically means that they are interchangeable. The same customer would consider these houses in their choice. If not, it’s not a good comp.

9. Comps should be interchangeable to the same client. If both homes would be on your showing list for this particular customer, then chances are it’s a good comp. Just because a house is in the same price range, doesn’t necessarily make it a comp. For instance, a client with two small children may not be interested in the two bedroom with 800 sqft for $159,900, but the 3/2 at $158,900 would be. Even though the price is close, they are not comps. Things like style-ranch to ranch-1 ½ story to 1 ½ story, split level to split level, the same interchangeable theory. Just remember that just because the house is a block away does not automatically make it the best comps. That’s what an AVM looks at, proximity not comparability. Realtors are the pros, we understand what makes a comp a comp.

10. Time. In an active market, comps need to be within the last 90 days. It’s one of those things where local expertise is critical. You have to know the current market. You also have to know things like neighborhoods. Your market may be down 10-15% altogether, but there are 1 or 2 S/D where people are always waiting for something to come for sale. Regardless of the market, the location is always in demand. The same principles of time would not apply, but you have to know where and when this applies. If the market is slow, you can go back six months and in some cases have to go back a year. But it’s all relative to the current market. Remember that appraisers have to prove values based on closed sales so keep that in mind when you’re looking at comps. However, a realtor has to look at the bigger picture in coming up with a value. What’s the competition? If there are ten homes on that street, values down. If there’s one house that you are getting ready to list and nothing has sold in that neighborhood in six months, you have to take that into consideration. Look at solds, active listings, call about pending sales, it’s your job to get the most money possible in a realistic timeframe. You are not helping anyone by overpricing a home. Least of all the seller and you hurt the profession. Please don’t “Buy” a listing.