You might experience the problem of not knowing what price to put on the table, regardless of whether you’re a home seller or a potential home buyer. It’s important for sellers to set a listing price that accurately represents the property’s value, appeals to buyers, and still generates a profit. Buyers, however, are interested in getting the most for their money. How do you determine whether a price is fair or drastically off? This is where comps come in.
What Are Real Estate Comps?
Real estate comparables are one of the most important tools used to determine how much a home is worth. The term “comps” is short for “comparables” or “comparable sales”. Real estate comps are recently sold homes that, in terms of location, size, condition, and features, are comparable to the home you’re trying to buy or sell — making them the ideal preference for price comparison.
The sales comparison approach uses the substitutional principle to calculate the value of a specific home. The value of a home can be determined using this theory by calculating the price that would be required to buy a similar, equally desirable property. Therefore, the pricing of the property will be more accurate the more similar the comps are to the property.
By analyzing real estate comps, you can modify the sales prices of the comparable properties to determine how much more or less the subject property ought to cost. But you need to examine at least three or four different comps in order to come up with a reliable estimate of the subject property’s value.
Factors That Characterize Comparable Homes
The more similar the comps or comparable homes are, the more likely that the pricing is accurate. So here are some of the key factors that are usually considered when identifying comps:
Location: Comparable properties should be as close to your property as possible because factors like the location, environment, and accessibility to important spots can impact the market value. Typically, the property should be within a 3 mile radius.
Size and square footage: The comps must be identical in size. Because houses can come in a large range of square footage, +/- 300 feet isn’t always applicable. Instead, I use +/- 10% of the subject property. That way, the range for comps is more adjusted to the subject property. Size is also relevant in terms of lot size, since that can add or detract value too. Additionally, the price per square foot must fall within the same range.
Property condition and age: The properties being compared must be in a pretty similar condition and be built roughly the same time. However, keep in mind that if a property has been renovated, adjustments should be made.
Features and amenities: The number of bedrooms, bathrooms, and other important features must be the same between comps because these factors also influence value and cost.
Date sold: Location, size, condition, and features are all excellent comp characteristics. We’d like to mention one more: date sold. It’s great if you can find a very similar comp, but don’t use it if it was sold three years ago. We typically look at properties that are less than 6 months old, but we will consider properties that are up to 12 months old if necessary. This is to ensure that we are using up-to-date figures that accurately reflect current market conditions. It is also critical to keep in mind the market’s direction. In general, you should be conservative, but in a correcting market, it is especially important to be safe with the numbers.
Who Uses Real Estate Comps and How Do They Use It?
When performing a comparative market analysis for properties in a region, real estate comps are used. Real estate comps are used in a variety of ways by realtors, appraisers, home sellers, homebuyers, and lenders.
Appraisers: To conduct home appraisals on single-family homes, townhouses, condominiums, and other types of real estate, appraisers rely on comparable sales prices and other factors.
Home sellers and buyers: Home buyers and sellers can use comparable sales to determine the appropriate list prices for new home sales. Homebuyers can use house comps to determine whether a particular property is priced fairly for the local market.
Real estate agents: Real estate agents use comparable sales data to determine a fair market value for a client’s property that is acceptable to both the current owners and potential buyers in the housing market.
Lenders: To determine the terms of home loans, lenders, like Pacific Equity & Loan, use local market valuations in the context of the current economy. They are able to determine whether a sale price is reasonable for the current market and whether a loan will accurately reflect a home’s value.
Why Are Real Estate Comps Matter For Investing?
For a variety of reasons, real estate comps are essential when buying investment properties. Comparables primarily determine the success or failure of any investment. Below are a few of the common reasons why comps are important in real estate investing:
Lowering risks: A buyer, a seller, or a real estate agent can determine the fair market value of a property by evaluating comparable properties. This prevents a buyer or broker from paying too much for a property. You can therefore get the best deal on an investment property by using comparable sales.
Deal negotiation: When investing in real estate, negotiation is important. Real estate agents, buyers, and sellers can all negotiate with sellers using comparable sales. Thus, both buyers and sellers could use comparables to get what they want from a deal.
Making profit: Real estate comparables help buyers, sellers, and agents choose the properties that will yield them the highest profit margins. Given that the objective is to maximize profit, this is extremely important.
Where Can I Find Real Estate Comps?
Real estate comparables can be found in a variety of places. Major platforms consist of:
Online Real Estate Marketplace: For common investors, it is best to explore the internet and make use of websites such as Zillow, Redfin, or Realtor.com to look up for comps. These websites have a “Find A Home” feature that can make finding comps quick and easy. However, keep in mind that properties looked up from such websites are not as accurate as those obtained from agents, and the possible comparables you may see may not be as close to your desired property as you might presume.
Multiple Listing Service (MLS): For real estate agents, one of the best places to look for comps is the local multiple listing service website (MLS). This service offers data that is frequently more accurate.
Real estate agents: Real estate professionals with experience know how to use MLS to find relevant property comps. Agents will interpret comps more accurately because they are more familiar with the area where you want to buy or sell a property. They will assist you in comprehending price per square foot as well as the appreciation of home value.
Public property records: When looking for comps, the majority of counties have records for the sale process of particular comparables. In some locations, you can search the records online, while in others, you need to go to the courthouse. County records, though, might not reflect the seller’s concessions. Therefore, if the seller reduced the price to provide credit for the required repairs, you will only determine the final reduced price and not the actual asking price.
Bottomline
Real estate investors’ returns on investment may be significantly impacted by their rash decisions. Investors must estimate the value of a potential investment property in order to include it in their business plans in order to make the best decisions. Utilizing and comprehending real estate comps is the most effective and quick method of determining the value of a potential investment property. This requires practice and careful research at first. But eventually, real estate investors perform comps into their investing process and employ them to expand their businesses.
Ready to start your property investing project? Here at Pacific Equity & Loan, we have a team of loan experts who will guide you through the process of securing your investment property. Call us today at (253) 336-6764 to get started!
Citations
“What Are Comps and Why Do They Matter?” RSS, https://www.kingvegashomes.com/blog-posts/what-are-comps-and-why-do-they-matter#:~:text=Comps%20are%20recently%20sold%20properties,a%20home%20up%20for%20sale.
Martinez, Alex. “Home.” Opt Out Life, https://optoutlife.com/the-importance-of-real-estate-comps-for-investing/.
“Real Estate Comps Explained: How to Use Real Estate Comps – 2022.” MasterClass, https://www.masterclass.com/articles/real-estate-comps-explained.
Kielar, Hanna. “What Are Real Estate Comps?” What Are Real Estate Comps? | Quicken Loans, Quicken Loans, 8 July 2022, https://www.quickenloans.com/learn/real-estate-comps.
