“Comps” is short for Comparable Sales and they are determined through completing a Comprehensive Market Analysis (CMA). Your agent is comparing the “subject property” – the house you want – with comparable homes in order to estimate the probable selling price of a property, typically as a price range. When looking for comparable homes, your agent will be looking at:
- Location – Probably the most important factor
- The date of sale of the properties
- The size of the homes
- The floor plan or style
- The number of bedrooms and bathrooms
- Improvements and overall condition of the home – additions, new roof, new appliances, renovations
- Amenities – pool, fenced yard
- Garage size or availability of parking
- Potential negatives – busy street, near industrial area
When choosing “comps,” your agent will not include transactions that are, or were, in distress. For instance, a short sale or foreclosure is not a comp for standard sales.
A CMA is not an appraisal. This is a market analysis prepared by a real estate agent, not by an appraiser.
Your agent will also be considering the current state of the market and where it is headed. This will include looking at absorption rate, days on market, ratio of sales price to list price, etc.
Let’s drill down on a few of these factors:
Location is one of the most important factors in preparing comps. Different areas will use different “locations,” for example: comps may be within the same subdivision or neighborhood or within the same school district in a suburban area. This area is probably within 1 mile of the property. If you are looking at a condo in the city, the location may be within the same condo building. In a city, you will not likely go out a full mile. Think more like ½ mile. And in more rural areas, you will stay within 5 miles. The reason why I am using words like “you may” or “probably” is because each market and each area is different. Experience helps real estate agents know how to focus on the correct area for pulling comps.
Date of Sale
True comps are closed sales because active or pending homes could be over- or under- priced. Only when a home sale is closed can you get a sense of the value. The sooner they have closed the better. Within 6 months is great but, in certain markets, you may need to go back one year or potentially more to gather more data. There may also be seasonal differences – for instance a house may sell for more in April than it would in November. I personally like to look at what is actively for sale and is your current competition, what is pending and how long it took to go under contract at that price, and, of course, sold homes. I also like to see a larger time frame at first. After seeing this bigger picture, I drill down to closed sales in the recent past that are comps for the house. Starting with a bigger picture and then narrowing your focus can uncover interesting information. I also look at the history of the home in question – When did the seller close on the house? Have they tried to sell it since unsuccessfully? Have they been renting it? The more information the better.
It can be easy to find comps that are the same size – think condos with the same layout or townhouses in the same development. But when you get into single family, detached homes, it can be hard to keep your comps to the same size. In general, for larger homes, a good rule of thumb is to say within 300 sq.ft.
Another factor to keep in mind is land. The total size of the lot will affect the value of the home. In addition to the size of the lot, the view from the lot is also important.
Current State of the Market
Are you in a stable market or a changing market? A buyer’s market or a seller’s market? A seller’s market is one where the demand for homes is high and the supply is low. Home prices are generally heading upward in a seller’s market. A buyer’s market is when demand for houses is low and supply is high. Home prices are generally flat or heading downward in a buyer’s market. If home prices are going down, the subject house will probably get less than a house that sold 6 months or one year ago.
As you can see, a lot of factors go into running comps. It is part art and part science. Knowledge of the market and experience help agents choose the parameters. Every home is unique, but finding comparable properties can give you an estimated value range that house represents the price it will likely sell for. At the end of the day, a house is worth what a buyer will pay for it. A house can be worth $500,000 and a buyer can choose to pay $575,000 because they want to live next door to their best friend, or because they have to move right away and that is their favorite home on the market, or just because they got caught up in a bidding war they had to win. The best thing you can do is review the CMA, decide what the house is worth to you, and don’t offer to pay more than that. If the seller is also willing to sell at that price, you have a deal.