When it comes to the homebuying market, buyers and sellers both need to place a high level of importance on comparable sales. Known throughout the real estate industry as "comps," comparable sales are the sales prices of similar homes.
A good strategy would be to have your agent show you at least 10 comparable sales on the market. When a homebuyer tours homes, that buyer is comparing homes for sale throughout the entire market, so comps provide the best way to get a view of the whole playing field.
The Importance of Comparable Sales
A seller can use comparable sales to justify an asking price to the buyer. However, buyers will ultimately pay an amount they believe is a fair price. You have probably never heard a buyer say: “I should have paid more for that home.” Buyers generally want to pay less.
To the contrary, buyers sometimes worry that they will pay too much for a home, especially when they are buying in a down real estate market. No buyer wants to find out that the home they just purchased is worth less than its original price.
An appraisal is a good way to determine and justify value. However, appraisals are solely an opinion of value. An appraisal is only as good as the experience and knowledge of the person who prepared it. If the buyer’s appraiser submits a low appraisal, the seller has the option to lower the sales price. If the seller refuses, that’s when a buyer might contest the appraisal. Buyers can contest the appraisal by submitting comparable sales.
Appraisers use comps in their evaluation of your home, but you can submit different comps if you feel that the ones chosen are outdated or otherwise don't represent similar homes to yours.
While it's possible to adjust an appraisal for outstanding factors when the comparable sales are few and far between, the best ones will always be those that fit most closely with the criteria of the subject property.
Components of a Comparable Sale
Comparable sales are neither active listings nor pending sales. Those values don't carry the same weight as a home that has already sold. Comparable sales are used as an example to justify why a buyer doesn't want to pay more than the last occupant for a similar home.
Below are the main components of a comparable sale:
Recent Time Frame of Sale
In years past, appraisers would sift through public records from the previous six months to pull comparable sales. Since the 2007 subprime mortgage meltdown, that time frame has considerably tightened. Nowadays, appraisers generally try to emphasize the last three months of comparable sales.
Ideally, a researcher would consider sold statistics within a certain radius, typically within a one-quarter to one-half mile of the subject property. The closer, the better. A home that fronts a busy street would be worth less than a home facing a lake.
Similar Square Footage
You can’t take the price of a 1,000-square-foot home and double it to determine the value of a 2,000-square-foot home. That’s because the per-square-foot cost of smaller homes is higher than the per-square-foot cost of a larger home. Ideally, you want to compare homes within 10% of your subject property's square footage.
Similar Age and Construction
You will hear people say, "They don’t build homes like they used to." That doesn't necessarily mean older homes are better than newer ones. The values, however, are different because of character and appeal. A tile roof, for example, can enjoy a 50-year life, compared to the 25- to 30-year life of a standard composition shingle. Comparison sales should reflect similar types of homes.
Similar Lot Size
In some newer home tracts, you might find a mix of lot sizes. For example, a zero-lot-line means the home really doesn’t have a yard. The side or backyard might be very small, without grass or vegetation, which typically doesn't appeal to families with children. Many areas compute lot size based on actual square footage divided into 43,560 square feet (one acre). A quarter of an acre (.25 acre) is 10,890 square feet. Comparisons shouldn't look at vastly different lot sizes.
Unless you are working with a neighborhood specialist who has intimate knowledge of the condition of most of the homes in a specific area, it can be hard to determine the condition of a comparable sale. A stripped foreclosure home owned by the bank, missing its appliances and copper plumbing, is worth much less than a turnkey home, updated with new appliances, carpeting, and paint. If you’re really lucky and you’re comparing homes in a subdivision, you might find exact model duplicates to use as comparable sales.
Weighing all of these characteristics together across several similar properties is one of the best ways to accurately assess a home's value. Appraisers and agents can use these to ensure both the seller and the buyer are satisfied with the final sale price. Never finalize a sale without a thorough review of comparable sales.