The vital importance of comps
The term “comps” in real estate stands for comparable sales, i.e. what other properties are selling for that help determine any home’s value. The importance of comps cannot be understated either. All parties to a potential transaction rely on them.
What determines a reasonable comp
Any property that helps define the current market value of another home would be considered a comp. Different properties are selling — some could be reasonable comps, and some not so much. When thinking about the importance of comps, think of them as such: comps are like evidence in a trial, where two opposing attorneys (the agents) are arguing how the evidence (the comps) either helps their client or are unimportant.
Who uses comps in real estate
- Listing agents use comps to determine the value of a home, to then speak with sellers before the home goes on the market
- Buyer’s agents use comps if they have an interested buyer, in order to find comps that they could use to argue on behalf of their client
- Listing agents continue to watch for new comps if their client’s home sits on the market unsold
- Listing and buyer’s agents both pour through the same comps when negotiating an offer, arguing whenever possible how the comps support their client’s stance
- Finally, the real estate appraiser places a high value on the importance of comps when doing the appraisal, which is required in almost every situation where a buyer is using financing
Not all comps are created equal, nor do some comps have all the qualities that would create the “ideal comp”. Here’s are the three most common aspects to consider.
1. Proximity
How close a potential comp is to the subject property is very important. In the city, that could mean just the matter of a few blocks — in the suburbs, likely within the same subdivision or corner of town. Using comps on the other end of a neighborhood/suburb often won’t cut it — within a block or two, absolutely.
Homes that share a neighborhood often share the same distance to restaurants, shops, stores and often attend the same schools — and therefore far outweigh comps that do not. In situations where it’s a more rural area, or there are just fewer comps overall, the further in distance is considered more acceptable.
2. Similarity
Equally as important is how similar the comp is to the subject property. Agents arguing that dissimilar comps are worthwhile often falls on deaf ears by the other side. Here are a few examples:
- Condos: a 2‑bed/2‑bath simplex (on one level) home should be compared to other 2‑bed/2‑bath simplexes, and not to a 3‑bed duplex
- Single-family homes: a 3‑bed 2‑bath ranch is a far cry from a 4‑bed 3‑bath four square
Finishes, layout, exposure, floor level (for condos), and condition all play an integral part in how similar the subject home is to the comps.
3. Recency
What would be a more reasonable determiner of value — a home that just sold, or one that sold 11 months ago? You know the answer. While the other two aspects are extremely important, this could be the most imperative. Plain and simple, it is what is going on right now. Perhaps saying it is the most important of the three is a little strong. It is, however, the lens through which weight is given to each of the comps being used to argue value.
Within three months are normally great, six months is getting a little long-in-the-tooth, and older than that is really stretching it. As is the case with proximity, if there are only a few comps overall, then there may be no choice but to go further back to find comps and argue changes in the market since that time.
Final word on the importance of comps
Comps are one of the most integral aspects of residential real estate. They are how agent valuations, negotiations, and appraisals are based. Without them, most any argument on value is without merit. And each one must be viewed on how much it adheres to these criteria. If an identical home next door just sold, whether you like it or not, that’s the strongest comp.