What Are Comps?
Still a weird time to be, well, anyone. We’re still keeping social distance, buying takeout, learning new stuff and waiting for someone behind a podium to give some good news.
In the meantime and in light of learning new stuff, enjoy the debut of WWWWWH (Who, What, Why, When, Where & How). In it, you’ll get some background on a given topic related to real estate. Today, we’re discussing the well-worn concept of comparable properties (the cool kids call them “comps”) and how they affect the value of your property.
Thank you for being a part of it and may God continue to bless you!
WWWWWH – Comps
Let’s Start Here – the CMA
A comparative market analysis (CMA) is done by a real estate agent and studies “recently sold properties that are similar to your own home (or, if you’re a home buyer, the one you want to make an offer on). Similarity is key, since it gets you closest to an apples-to-apples comparison.” (Realtor.com) In other words, it’s a primary tool used to set a list price (if you are the seller) or an offer price (if you are the buyer). It is not to be confused with an appraisal which is ordered by a mortgage lender (in general) and is utilized to assess loan values for a given property. CMA’s will produce a range of prices based upon the analysis and provide sellers/buyers with insight to assist in the sale/purchase of their home.
Remember this part – similarity is the key.
The Factors Affecting Your Comp Choices
I’ve done several CMA’s, even passed courses/tests to achieve a level of pricing expertise and this much is clear – it’s not an exact science. That said, experienced agents will very often arrive at similar conclusions of value if CMA’s are done right. Market conditions, area, age of home, architectural style, timing of the comps’ sales, lot size, living area and a multitude of other factors contribute to our reports.
Here’s where it gets good – the MOST IMPORTANT COMPONENT OF THE CMA IS THE COMPARABLE PROPERTIES SELECTED. I put that in caps and bold because there is no substitute for choosing the most similar properties (preferably three) to compare. Remember when we said similarity is the key? It is the key but the problem is that similar can be a moving target.
For example, in a populated suburban community, similar properties may be all around you and in a good market, there’s a good chance a few have sold in a tight radius in the last three months. Contrast that with the community in which I live…fewer than 8,000 people and home styles, ages and sizes are all over the map. Add to that the likelihood that “similar” properties may not have sold in the last year. What to do? Glad you asked.
If nothing similar exists in recent sales or even current listings, there are adjustments that can be made for market conditions, time, styles and other differences between properties. It is a market-based approach and requires your friendly agent to do legwork to find the market’s historical response to differences and adjust your property’s value range accordingly. It requires a lot of work but the better the info, the better your chance of selling/buying at a fair market price in the best time possible. And in general, appraisals from lenders will come to similar conclusions.
What’s the Takeaway?
If your agent has done the work to produce a solid set of comparable properties to help you establish value of your home or one you hope to purchase, ask questions so you understand why they were selected and what adjustments were made.
Often, sellers will want to set the price high to accommodate negotiations and even hope for a higher-than-market sales price. Unfortunately, it usually results in a property sitting on the market too long and even if we do get to an agreement, lenders will almost never lend above appraised value. Conversely, buyers will offer low thinking that negotiations will take place and often lose out to a better offer in the meantime. It’s better to simply act on good information.
Make sure you understand why comps were selected, what adjustments were made (if any) and how the price range was established. Then take the lead and price accordingly.