Just as crucial as it is to understand financial terminology before applying for a mortgage, it’s equally important to have a strong grasp of real estate terms. When going through the home buying or selling process, you will hear the term “real estate comps” thrown around a lot. Real estate comps are a tool used to determine the market value of a home.
Regardless of whether you’re buying or selling a home, you should understand what real estate comps are and how they affect the properties’ pricing. Leveraging this information will not only enable you to make informed decisions about offers and pricing but also provide you with more power to negotiate.
What Are Comps In Real Estate?
Real estate comps are recently sold homes that are similar to the property you’re trying to buy or sell in terms of location, size, condition and features. Comps, an abbreviation of “comparable sales,” are used to determine a home’s fair market value through the sales comparison approach to pricing property.
The sales comparison approach uses the principle of substitution to determine what a specific home is worth. According to this principle, you can figure out the value of a home by finding out how much it would cost to purchase a similar, equally desirable property.
Therefore, the more equivalent the comps are to the property, the more accurate the pricing of the property will be. While the location, square footage and condition of the properties should be nearly identical, there are other elements of the homes that must be taken into consideration. These elements include the number of bedrooms and bathrooms, age and quality of construction and design, lot size and special features like garages, swimming pools and fireplaces. To truly be considered similar, the comps should also have sold in the last 3 – 6 months under market conditions that are as close to the current state of the market as possible.
By analyzing real estate comps, you can determine how they differ from the subject property and then calculate how these differences have affected their sales price. Doing so allows you to adjust the sales prices of the comps to figure out how much more or less the subject property should cost. But in order to ascertain a reliable estimate of the subject property’s value, you must analyze at least three or four different comps.
How Do I Find Real Estate Comps In My Area?
The ideal way to find real estate comps in your area is to explore your local multiple listing service. The MLS is a database that real estate agents use to list homes for sale. The database provides extensive information on homes that are currently on the market, as well as those that have already sold. As such, the MLS enables individuals to explore recently sold properties and obtain enough information to determine whether those homes are similar enough to the subject property to be considered a comp.
Unfortunately, the MLS can only be accessed by licensed real estate agents. So, if you want to find the best and most accurate comps for the home you’re interested in buying or selling, you really need to work with a real estate agent.
Can I Find Comps For Free Without An Agent?
Although best to consult a real estate agent, it is possible to find comps for free without the help of an agent. There are a number of websites that aggregate information taken from local multiple listing services. These websites, which are accessible to the public, allow you to explore recently sold properties in your area and provide insight into the value of these properties.
However, the information found on these websites is often inaccurate or outdated, so you need to be careful when using them. These websites can be used to gain a glimpse into the overall range of a home’s market value, but they shouldn’t be used to determine a specific price.
A more accurate source for finding comps would be to use public property records. Depending on your county, you may be able to find these records online. If not, you’ll have to visit your county assessor’s office, which maintains records of all recorded local sales transactions. However, the public records won’t show the properties’ original asking price nor any seller concessions negotiated.
Seller concessions are the closing costs or repairs that the seller agreed to pay. They are particularly important to know when analyzing comps because they can distort value. For example, if a comp was purchased for $450,000, but the seller agreed to pay $13,500 of closing costs, the sales price of the comp would have to be adjusted based on these concessions. The value of any seller concessions must be subtracted from the sales price of the comp to determine the true value of the subject property. As a result, the comp would be viewed as having sold for $436,500 instead of the full $450,000. Therefore, you can’t truly use a property for comparison without knowing the specific terms of the sale.
Why Is It Best To Consult A Real Estate Agent When Looking At Comps?
While you can find comps for free, keep in mind that searching for comparable properties is only the first step in creating a comparative market analysis to determine the fair market value of a home. Once you have found comps for the property, there are still three more steps you need to complete to determine the value of the property you’re interested in.
You must analyze the comps to see how they differ from the property and calculate the approximate costs of those differences. Then, you must adjust the sales price of each comp to determine how much each comp would have sold for if it were identical to the subject property and sold under current market conditions. Finally, you have to review the range of adjusted sales prices, weigh each comp based on how similar it is to the property and apply those weights to determine the market value of the property.
This process is lengthy and requires a lot of research, as well as a full understanding of how specific elements of properties increase or decrease their overall value. Real estate agents not only have access to the most accurate information but also possess the knowledge and skills necessary to run a comparative market analysis and arrive at an appropriate price for properties. That’s why it’s highly recommended that you enlist the services of an agent when using real estate comps to estimate the value of a property.
Who Uses Real Estate Comps?
Real estate comps are used by all parties involved in real estate transactions. Let’s take a quick look out how home buyers, sellers, appraisers and real estate agents benefit from the information comps provide.
Comps demonstrate how much buyers have been willing to pay for similar, recently sold properties, which makes them a very useful resource for current home buyers. After finding a home they’re interested in, buyers will look up comps in their desired area to help them get a sense of how much they should offer.
By seeing what other buyers have paid in the last few months, buyers can ensure they don’t offer to pay more than the home is actually worth and avoid making a lowball offer that’s likely to be rejected by the seller. Furthermore, buyers can use the knowledge they’ve gained from the comps to negotiate for a lower price or seller concessions.
A clear understanding of comps is crucial for sellers, especially those FSBO sellers who don’t want to work with an agent. When trying to decide the best listing price for their home, sellers often struggle to keep their emotions from clouding their judgment. Many sellers have unrealistic expectations of what their home is worth, which is why comps are so important. Analyzing comparable sales provide sellers with a more objective way of determining the appropriate listing price for their home.
Since comps provide a window into a home’s fair market value, sellers can use them to keep their expectations in check and ensure that their home sells faster. Comps are also useful for sellers when negotiating counteroffers. If buyers make lowball offers, sellers can use comps as evidence for why their home is worth more.
When determining the valuation of a property, appraisers will inspect the property, review public records and source comps from the MLS. By reviewing the comps, appraisers can determine what buyers have been willing to pay for similar homes in the area recently, which is paramount to assessing a home’s current fair market value.
Real Estate Agents
Real estate agents rely on the MLS to find comps and then use the information about each comparable property to run a comparative market analysis. The CMA is a report that agents provide to buyers and sellers. The report compares the home to similar properties that have recently sold or are currently on the market and uses the sales comparison approach to pricing to arrive at an estimate of the home’s fair market value.
For buyers, the CMA enables them to make informed decisions about how much money to offer for a specific home. For sellers, this analysis helps them come up with a listing price for their home that’s in line with the sales price of recent transactions and just below the asking price of currently listed properties.
The Bottom Line
Real estate comps are a crucial tool for determining the market value of a property. By finding similar homes that have recently sold in your area, you can not only determine how much you should pay for a new home but also how much you should ask for when selling your current home. While you can find comps on your own, working with a real estate agent will help you complete the calculations necessary to arrive at an appropriate price to buy a home or sell your current one.