Comp selection is key to pricing
They say that when appraising a home 90% of the battle is picking comps that closely match your listing. I think that this could be said for pricing a home as well. If you nail comp selection then the value indication will be more accurate and reliable.
You shouldn’t make the mistake of only choosing sales that agree with your preconceived notion of the home’s value. One way to do this is to consider what characteristics are most important to the buyer of the property. In addition, you should also look at what features would motivate the buyer to purchase the home.
An appraiser’s job is to measure value so we are trained to recognize and measure the features in a home that create value. In addition to property features, we have to keep in mind the location of the property. It would be easy to think a home is worth a certain amount and then go looking for homes in areas of town that support your value. This is definitely not the way to go about comp selection though. Today we’re going to look at 5 important things to consider when picking comps for your listings.
Tips for agents picking comps for their listings
1) What school system are they in? – I don’t know about where you live but home values in the Birmingham, AL area are strongly driven by what school system they are in. Buyers are willing to pay more for homes in certain school systems.
It would not be appropriate to pick comps from an area that sells for more because it is in a better school system. If there is a price difference between two school systems and you use a sale from a school different from where your home is located you should make an adjustment for this. Determining these value differences can be a difficult process, that is why doing this is not recommended.
2) Do you have the correct square footage of the home? – This is an area that I see agents making the most
mistakes with. When pricing a listing you should only consider the most reliable data sources.
The best sources for accurate square footage information is house plans, a previous appraisal, or measurements by a person familiar with how to measure and calculate the square footage of a home. If you consider that being off by 100 square feet on a $100 per square foot home results in a difference of $10,000 then you start to see how important this is. How can you truly comp a listing if you don’t have accurate square footage?
3) Would a buyer for your listing also consider the comp you’re using as a similar substitute?- When you look at comp selection in this way it becomes clear that the more similar the comp is to your home the more accurate your list price will be. A buyer looking to spend around $200,000 for a 2,000 square foot slab home on a garden home size lot would not consider a 3,000 square foot home with full basement and pool on a half acre lot.
You laugh, but that is exactly the scenario I found myself in recently. I always accept comps provided by agents and I just sat there and scratched my head wondering how in the world the agent thought this house would be a good comp. It did get the home up in the price range that they had it listed for but unfortunately it did not appraise.
4) Did the comp sell for way higher than what you think the home may list for? – This kind of goes with the previous point. If the home is priced higher there is probably a reason for it. It could be bigger with more high-quality features. It could also be a superior area with a better school system.
When you are in this type of situation you should look for something to give you context as to the value of the home. This may include looking at sales that are a little older, but that are similar and in the same neighborhood. Even though you may not use a one-year-old home as a comp, you can still look at it to see what the prices were 12 months ago. If they were selling for $100,000 less than the current sale you are considering as a comp there is probably some underlying reason for this and further investigation should be done.
5) Are they in a “better area”? – The better area usually translates to higher priced. Knowing the different areas of town that you sell in can provide a wealth of information.
Picking comps from better areas should never be done unless there is no other choice and if it is done there should be an adjustment for the difference in location. If two identical homes in different locations sold but there was a $50,000 difference in price then that is probably the adjustment you should make. Again, like I said previously, this should be avoided because the more adjustments you make to comps the less reliable and comparable they become.
6) Are they the most recent sales? – The newer a sale is the better picture it will give you of the current market. This is not to say that you cannot use older sales but you should keep several things in mind.
An older sale can give you an accurate indication of value if the market has been stable. If there are newer and similar sales that have occurred I would definitely consider them first but you could also use the older sales as back up confirmation of your list price.
An older sale can give you insight into whether there is an appreciating market. If this is the case and you know that prices are increasing this can help you determine what part of the price range you feel is most appropriate to price your listing at.
Picking comps is more than just choosing several sales that support your preconceived notion of the value of the home, or even what the owners say they want to sell it for. Knowing how to choose comps can help you price your listings for a price that is based on market data and that will sell it in the shortest amount of time.
Question
Do you have any other questions about picking comps for your listings? If so feel free to contact me and I’ll do my best to answer them for you. You can also leave a comment below and we’ll keep the conversation going. As always, thanks for reading.
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How do you pick comps for a new Fema compliant home? The home was completed in April 2108.The only comp. I can find is 5 miles away.It was sold March 2018. A home sold a few blocks away for $1,4 million built in 2003 and not raised or Fema compliant.The cost to build waterfront has increased dramatically,helical piles .storm watch windowa just to name a few.Can I use that comp? Will the bank appraiser use that comp?
I don’t think it would be a problem using that comp. I would adjust for any locational differences if there are any. Also, you could see what type of an impact the building requirements had on that sale compared to others near it and then use that adjustment for sale near the subject.
Tom, I truly appreciate this post and all the great comments-very helpful! I would like your opinion on value when considering homes on a corner lots. Thanks!
Thanks, Leigh Ann. I think there is a common belief that a corner lot would sell for more, but you really need to look at other sales to see if this is the case. The best way to see if there is a difference is to look at all the corner lot sales and compare them to the other non-corner lot sales. The sales don’t have to be recent because you are just looking to see if the corner lot sale was more than the others. If you determine there is a price difference then you can apply that adjustment to recent sales. Of course, if there are some recent corner lot sales that would be great too.
Thanks Tom, great post as always and plan to share on our APP for our Realtor Board. Assume that is okay with you?
Mary
Thanks, Mary, and yes that is fine. Thank you for sharing!
Thank you for advice on selecting comparable sales. When I’m selecting comparable sales, I always think to myself that the best comparable sales are the ones that need the fewest adjustments. However, sometimes, it is easier to make a square footage adjustment or a time adjustment than to make an often less quantifiable condition, location, or quality adjustment. Additionally, when selecting comparable sales, I’m looking for something that is definitely better and something that is definitely worse overall (hopefully only slightly) so I can start to form a range before I make any adjustments.
Great perspective, Gary. I couldn’t have said it better myself.
Tom, great tips! I ran into a situation a couple months ago where an agent had used parameters that were too narrow, only using sales within 100 sf of the Subject’s sf, and using the same bedroom count. The only sales that came up in her search were sales over a mile from the Subject, which were all superior quality homes and had superior neighborhood amenities. By excluding any reasonably similar sales from the Subject’s immediate neighborhood, she overpriced the listing and naturally, the appraisal came in low.
That is an excellent point, Lanette. Using parameters that are too narrow can definitely exclude some sales. I am doing a talk at an agents office soon and will make sure to bring this up. I usually like to start at +/- 500 square feet, 12 months, and +/- 10 years and then work down from there. If there are a lot of sales I will tighten the parameters until I find the most similar and recent sales.
Solid post. I love Bill’s comment on the school district too. It’s not always easy to see those school boundary lines, but it can be a HUGE factor in value. Some neighborhoods really only have one school though, so it’s a non-issue in those types of areas. Or other locations have an open district system, so it can maybe water down the impact of being located very close to a certain school unless there is a real advantage for living there.
I always recommend choosing sales that don’t need any adjustments. That’s the ideal anyway. If they are so similar that you don’t need to make value adjustments, those sound like good comps to me. This is good for the real estate community because at times that one house next door might seem like it should be a “comp”, but it’s really not similar in any way besides location.
Thanks, Ryan. Just like everything else, school systems may or may not mean anything especially if it’s like you said and there is only one school. I agree on finding sales that do not require adjustments. Even if they do then the agent can use a qualitative approach rather than quantitative. I did a blog post about this since you don’t need to know adjustment amounts to do it.
Tom, Excellent tips here! Thank you for sharing! The home pictured looks very similar to home styles in Baton Rouge.
I recently saw a HouseCanary shaded chart of local school systems and how the values differed per school district, very eye opening.
To me, age of subject and predominant value is huge on my mind, especially when choosing “comps” from other subdivisions. I recently had an Agent in a 40 year old ranch style $140K to $180K subdivision say “comps” in subdivisions where the 40 years old homes were in the $250s to $300K were comparable. They were only “sales” in a market, not “comps”.
Bill, that house is from a local garden home neighborhood. I think one of the biggest things we can do is to properly define what a neighborhood is and that sales are not always comps. If we can clear that up then it will go a long way in helping agents understand where they can go for sales and to not just use “sales” but look for properties that are truly comparable to their listing.