Unlike most things we buy in life, homes don’t come with a sticker price. Sure, the real estate listing may say the price of the home is $320,000, but that’s just a starting point. Buyers can—and should—offer more or less money for the house based on something called real estate comps, short for “comparables.”
Real estate comps are properties that have similar characteristics to the house you’re trying to determine the value of. They’re critical tools used by real estate agents when you’re ready to buy or sell.
Because it’s easier to compare apples to apples, the best comps are houses that are as similar as possible to the one being valued.
But sometimes the comps are incorrect, which makes it hard for you to arrive at an appropriate value for your home. Using comps to determine a home’s valuation is not entirely a science, but there are some signs your real estate comps are not accurate.
Sign No. 1: The comps are far away
When we say location is key in real estate, that doesn’t just pertain to the location of your home. Your comps’ location is important because they take into account the desirability of the school system and neighborhood, among other factors, explains Jon Boyd, broker and manager of The Home Buyer’s Agent in Ann Arbor, MI.
If there aren’t sufficient nearby comps (as can happen if you’re in a rural area), your agent might need to widen the search area. Ideally you’ll look at homes within roughly a half-mile so you are truly comparing houses that are being valued equally.
Sign No. 2: The comps are stale
Markets move fast, and using a comp from a year ago will give you an incorrect idea of home values in your area. Boyd recommends sticking with homes that have sold within the past six months; the more recent, the better.
Sign No. 3: The comps are really appraisals
Does your comp use a strict formula of square footage, bedrooms, etc. to arrive at a market value? If so, that sounds more like an appraisal, which is an entirely different way of determining the value of the home. Be careful not to confuse the data provided by these two documents, warns Molly Stehman, real estate broker with Premiere Property Group in Lake Oswego, OR.
“Comps are totally subjective and a lot of opinion goes into the numbers,” she says. Appraisers must follow rules that standardize the process of determining a home’s value. So when coming up with comps, in addition to objective measures like square footage and number of rooms, Stehman will add factors like whether the home has been updated or remodeled, whether the floors are hardwood or laminate, the walkability score, the age of the roof and furnace, and even what she calls the “charm factor.”
That’s why the picturesque remodel you’re looking at might be priced higher than the plain-Jane house down the street, even if the facts on the appraisal sheet are basically identical.
Sign No. 4: The comps include homes that are still on the market
To be useful, a comp has to tell you what the home sold for, not what the asking price is. The best indicator of a house’s value is what people have paid for it, not what they might be willing to pay (the seller hopes). Be sure your comps contain only homes that are off the market.
Ultimately, the seller or buyer decides how much they want to ask or what they’re willing to offer for a house, Stehman points out. But by making sure your comps aren’t off-base to start with, you can step up to the negotiating table feeling as informed as possible.