Whether you are the buyer or the seller you have heard the term “comps”. Most of us are aware that is short for “comparables” but are you really informed of what this means to us in terms of the sale or purchase or how they are used in real estate.
The terms “comps,” “comparables” and “comparable sales” refer to prices paid for recently sold homes that are comparable in size, style, and location. Real Estate agents and appraisers will use these as a basis to determine the fair market value of a property. How to determine which ones to use is a matter of great significance but also great debate.
To determine the current market value of a property, agents and appraisers analyze recent comparable sales in the area. But simply choosing which sales to include, or even defining the area, can be subjects of debate.
Let’s start with the basics.
Recent Sales-Like many adjectives, the term recent can be loosely applied to determine a time period usually from 1 day to 12 months. It will depend on the number of sales in the area and the type of neighborhood in general.
Location-It is imperative to understand the school districts and city boundaries when choosing. For instance, even though a house is on the same street it might be the street is divided and lies in two different school districts.
Size-Again like the term recent, size is a relative term. For some, it is the as simple as square footage. Others might judge it by the number of bedrooms and bathrooms.
Style-Even though two houses appear to be the same, we all aware that no two things are exactly alike. It is generally accepted that style description is universal but it does not mean that each house fitting that description is in the category due to the quality, additions, upgrades, etc.
In choosing comps, you need to be alerted to the standard of measures by which the agent or appraiser will define their choices. Having a working knowledge of these standards will allow you to understand the cost and real value of a property.
Real estate agents and appraisers often arrive at different comps. The agent is more like to come up with a higher price due to many factors such as he has a stake in the game. Appraisers tend to err more toward the objective side because it is their job to offer the lender a true fair market value.
Another true difference is the made in the value of intangibles. An agent will find more value in current remodeling done in the home based on the quality of the workmanship and which rooms were upgraded. The appraiser might determine a recent sale as comparable based solely on general information without even having viewed the other property except in picture or as a drive-by. The reason for the homes sale might have also been knowledge obtained by the agent and not the appraiser. If for instance there was a need to accept a lower price because of financial difficulties, an agent might incorporate that knowledge into his value, as the appraiser is will generally be unaware of such issues and merely see the lower price.
Regulations add to the gulf between comps generated by real estate agents and those generated by appraisers. New regulations are designed to keep lenders and mortgage brokers from influencing appraisers. But while appraiser independence is good in theory, appraisers often are hired to evaluate properties in places they’re not familiar with.
For the last few years, foreclosures and short sales have shaped the national real estate market. But distressed sales present problems when picking comps. Traditionally, appraisers considered the market and selected a sample from whatever sales had occurred in a neighborhood. That worked during a normal or stable market, the current market is different because there are so many short sales and foreclosures. Should these distressed sales influence prices for all sales in an area or only for other short sales and foreclosures? Your answer depends upon whether you’re buying or selling.
Appraisers pay attention to the ratio of distressed to nondistressed sales. Buyers will want to include these types of property values in their research as it will considerably lower the cost. However, a seller will want to stray away from these types of comparisons.
If traditional sales make up many of the sales in each neighborhood, then it is those sales that an appraiser will likely select. But if a neighborhood is dominated by foreclosure sales, then the appraiser will have to decide on which group of sales best represents the market.