August 2, 2021

August 3, 2021

What are Comps and Why Do They Matter?

Are you familiar with comps and why they're important for buyers and sellers? Keep reading for everything you need to know.

Whether you’re a home seller or a prospective home buyer, you may face the dilemma of not knowing what price to lay on the table. For sellers, it’s crucial to list a price that reflects the true value of the property, is attractive to buyers, and still leaves you with sufficient profit. On the other hand, buyers want the best value for their money. So, how do you know when the price is right, or whether it’s way off? This is where comps come in. But wait — what are comps, exactly?

What are Comps?

The term “comps” is short for “comparables” or “comparable sales,” also referred to as “real estate comps. Comps are recently sold properties that are nearly identical to the property that you are looking to sell or purchase. Comps must be similar in a variety of ways such as location, property size, features, and condition, to accurately determine the fair market value and price of a home up for sale. 

It’s important to land on a fair listing price to appeal to the buyers’ interest and hopefully reduce the time the property is on the market.

Using Comps to Determine Property Value

Comps are used to determine the fair market value of a property by using the sales comparison approach. This means you can more or less estimate a reasonable price for the home you’re selling by comparing it to the price of similar properties that have just been sold. The more identical the comps or comparable homes are, the more likely that the pricing is accurate.

These are the factors that characterize comps.

Market Conditions

The home you’re comparing your property with must have been sold within the last three to six months and under similar market conditions. The economy plays a big factor in determining the price and buyers’ willingness to pay.

Location

Comparable properties should be as near to your property as possible because factors like the location, environment, and accessibility to key spots can impact the market value.

Size and Square Foot Pricing

The comps must be similar in size, ideally within 300 square feet of each other. The value per square foot must also be within the same range.

Features and Amenities

Comps must have the same number of bedrooms, bathrooms, and other key features as these also affect the value and price.

Property Age

The compared properties must have been built around the same time and be in similar condition. But note that adjustments are made if a property has been renovated.

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The Types of Comps

Different types of comps can be used to determine the value of the house you’re looking to buy or sell, but they differ in levels of importance and purpose.

Home Sales

This type of comp is the most important one as it shows the similar properties that have been recently sold and for how much. This indicates what people are likely willing to pay something similar.

Pending Sales

This is the secondary comp that is reviewed. It’s not entirely accurate because the final price is unknown until the sale has officially closed. But it’s relatively helpful in estimating the rate, especially if the comp was sold quickly, which means it was likely sold close to the seller’s asking price.

Homes Currently for Sale

It helps to conduct a sense-check to see how you fare versus the competition. But take it with a grain of salt as the competition’s pricing might not be accurate.

Listings That Have Expired or Were Withdrawn

This type of comp indicates the pitfalls you must avoid to successfully sell.

How are Comps Used?

Comps are vital to all parties that take part in real estate transactions, but for different reasons.

Prospective Home Buyers

Comps help potential and active buyers understand the average market value of a property to avoid making inaccurate offers. Evaluating comps reduces the chances of buying into an inflated listing or making a baseless offer that’s bound to be rejected. 

Some buyers even do this without realizing it. It’s the same principle as comparing different shoe brands with the same specs to find the right one for you. However, doing this informally will likely not pull up an accurate market value as it may not factor in critical variables like market condition, age, and price per square foot.

Home Sellers

For those looking to sell their property independently without working with an agent (also known as “for-sale-by-owner” or FSBO), it’s crucial to develop an understanding of comps to set a realistic and fair price for the listing. Sellers who don’t do their due diligence of checking the market and reviewing competition run the risk of having unrealistic expectations about their property’s worth.

Without properly evaluating accurate comps, they might have an inflated perception of the home or be susceptible to low offers.

Real Estate Agents

Licensed real estate agents rely on multiple listings services (MLS) to find accurate comps, which they then use to create a comparative market analysis (CMA). This report compares the property being considered versus similar homes that were recently sold or currently also on sale. 

The CMA helps to determine the fair market value of the property. Take note that only licensed appraisers and real estate agents can access the MLS.

Appraisers

Using a combination of sources such as the MLS, public records, and physical inspection of the house, appraisers help determine the value of the property.

Comps are crucial to determining the market value of a home which helps ensure that both the buyer and seller engage in a fair transaction. Whether you’re planning to sell your property or you’re looking to buy your dream home, it’s best to work with an experienced real estate agent. Let’s talk today!