Real Estate Comparables (Comps) Definition

What Are "Comps" in Real Estate?

In the real estate industry, comparables (often abbreviated as “comps”) are properties that have similar attributes (such as the size, age, location, condition, and features) to the subject property being valued.

What is Considered a "Comparable" Property?

Comparable properties, or “comps,” are used as measuring tools to help to determine the fair market value of a property. Comparables are often used by sellers and real estate agents to determine a reasonable asking price for a property. They are also used by appraisers and buyers to determine what a property is worth.

In a perfect world, a comparable property would be 100% identical to the subject property in every conceivable way. However, in the real world, no two properties are exactly alike due to a number of factors (e.g. – the land the property sits on, the location of the property, the condition of the interior and exterior, the age of the property, etc).

comparable properties

Comparables can, however, be similar enough to the subject property to be a useful valuation tool. When looking for comparables for a subject property, the following features should be present:

Recently sold homes — In order for the comparable properties to be valid, the similar properties must be sold within the previous 12 months (with preference given to the most recent sales) under typical market conditions. Typically, preference is given to the most recent sales, but not always.

Fannie Mae offers the following guidance on this:

Comparable sales that have closed within the last 12 months should be used in the appraisal; however, the best and most appropriate comparable sales may not always be the most recent sales. For example, it may be appropriate for the appraiser to use a nine month old sale with a time adjustment rather than a one month old sale that requires multiple adjustments. An older sale may be more appropriate in situations when market conditions have impacted the availability of recent sales as long as the appraisal reflects the changing market conditions.

Nearby location — Generally, the location of each comp should be as near to the subject property as possible. When looking for comparables in an urban area, they should be within the same neighborhood or within competing neighborhoods nearby (if the competing neighborhoods offer the best possible comps). In a suburban location, comps should be within a mile of the subject property, but they can be up to three miles away.

As Fannie Mae explains, in rural areas, where it’s more difficult to find nearby comps;

Comparable sales located a considerable distance from the subject property can be used if they represent the best indicator of value for the subject property. In such cases, the appraiser must use his or her knowledge of the area and apply good judgment in selecting comparable sales that are the best indicators of value. The appraisal must include an explanation of why the particular comparables were selected.

School district, zip code, and subdivision should also be considered when choosing a comparable. For example, if the subject property is in a subdivision, a comp in the same subdivision will more likely be similar than a comp outside the subdivision. When the best possible comparable is located in a different subdivision, it typically should be in the same school district or ZIP code.

Size — Comparables should be of similar square footage to the subject property and have the same number of bedrooms and bathrooms as the subject property.

Property Type — Comparables need to be of the same property type: single-family, multi-family, townhouse, or condo.

Features/Upgrades — Comparables should have similar features and upgrades to the subject property. For example, a fixer-upper property would probably not be an appropriate comp for a newly renovated property. Likewise, a home with waterfront access and/or a view of the water would usually not be comparable to a home without waterfront access and a view.

Number of Comps — Having more than one comparable property helps value a subject property. Three to four comparables is often sufficient to determine the value of the subject property. The GSE lenders in the U.S. (Fannie, Freddie, HUD, VA) require three closed sales in each appraisal and many often require listings as well.

Arm’s Length Transaction — An arm’s length transaction is when both parties (buyer and seller) have no prior relationship. For example, if the sale of a potential comparable involved a sale between family members, the price of the home might not reflect the true market price. In order for a comp to be useful, it needs to be transacted between two parties with no prior relationship, or an arm’s length transaction.

How to Use Comparables

To get the most accurate comps, it’s first necessary to determine all the information about the subject property. The following should be noted about the subject property:

  • Location
  • Square footage of the building
  • Acreage of the lot
  • Number of bedrooms and bathrooms
  • Year built
  • Upgrades and renovations
  • Special features (wraparound porch, swimming pool, tennis court, barn, etc.)

Once a complete description of the subject property is made, a search for similar recently sold properties is conducted. Since no two properties will be exactly the same, adjustments usually need to be made. Adjustments are not made to the subject property; they are made only to the comparables.

cookie cutter houses

For example, if the subject property has a wraparound porch worth $8,000 but the comparable property does not have a wraparound porch, the value of the wraparound porch would be added to the comparable property. Likewise, if that same comparable property had a pool worth $30,000, but the subject property did not have a pool, then $30,000 would be subtracted from the comparable property.

If those are the only adjustments needed, the adjustments made to the comparable property would work like this:

Comparable property recently sold price: $385,000
Wraparound porch adjustment: + 8,000
Pool adjustment: – 30,000
Estimated value of subject property: $363,000

Part of a real estate agent’s job is to look up comparables for sellers and buyers, and when they do, the procedure is called a comparable market analysis, or sometimes referred to as a competitive market analysis. Both are abbreviated as “CMA.” Realtors have a variety of tools at their disposal to run a CMA for their buyer and seller clients, but anyone can perform a CMA.

Listing Prices vs. Sold Prices vs. Pending Sales

Seeing what similar properties are currently listed for can give sellers and buyers an idea of how to price a property, but the listing price isn’t necessarily the most accurate measure. Listing prices might be higher than true market value, reflecting the price a seller hopes to get, rather than what they’ll actually get.

comparable houses

Listing prices can also be lower than true market value, reflecting a lowball price if the seller is trying to start a bidding war or sell the property very quickly, so listing price might not be a true measure of a property’s value.

A more accurate comparison would be a property that has recently sold (“sold comps”). When the original listing price and the eventual selling price of a property differ (as they often do), the selling price is often a more accurate measure to value a subject property.

It’s also important to acknowledge that the sold price, while more accurate than the listing price, might not be the best representation of a property’s fair market value either, because it doesn’t always reflect the actual sales price if seller concessions were used.

For example, a home with a recorded sales price of $350,000 might have come with an agreement for the seller to pay $6,000 of the buyer’s closing costs, making the actual sales price $344,000. But $344,000 would not show up as the final sales price: the $350,000 figure would.

Ryan Lundquist of Lundquist Appraisal Company explains,

It’s also important to remember that “sold comps” are technically a reflection of the past, not what is happening today. To see the current market, an appraiser also has to look at comparable pending sales to understand what buyers are willing to pay right now. In an increasing market, one might see pending sales getting bid up at higher prices while in a declining market one could also see listings not entering into a contract at all.

RELATED: How to Determine the Value of Vacant Land

Comparables vs. Appraisals

Ordering an appraisal from a licensed appraiser is usually the most reliable way to determine a property’s value.

However, it costs for an appraisal, and even an appraisal isn’t guaranteed to be perfect (it’s entirely possible for two appraisers to evaluate the same property and come up with very different numbers).

Using comparables to value a property can be done at no cost, and this method of property valuation can provide a good ballpark figure.

Reviewed by Ryan Lundquist, Sacramento Appraisal Blog

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