7 Characteristics of Good Sales Comparables

What To Look For In Good Sales Comparables

I’ve heard it said that 99% of coming up with an accurate value estimate in an appraisal or pricing a home is getting the right sales comparables. If you don’t do this in the beginning everything else you do amounts to nil.

The whole idea of using sales comparables is based on the principle of substitution. This principle states that if you have multiple properties that are similar in quality, design, and appeal among other things then the one with the lowest price will attract the highest demand. It also states that the maximum value a property can bring will be set by the cost of acquiring a different but similar property. In other words, why pay more for one when you can buy another at a lower price?

The appraiser’s job is to analyze why buyers pay what they do for a similar property. If we can study why they paid what they did it can help us to determine what our property is worth.

By studying historical sales transactions the appraisal industry has developed a set of common characteristics that all good comps have. Today I want to share some of these with you so that whether you are an appraiser or a real estate agent you can use them to help choose the best sales comparables to price or value a property. Please leave a comment below if you would like to add anything else.

Top Characteristics of Good Comps

1) Square footage – Square footage is probably one of the most common methods of comparison for a home. Buyers want to know how big a house is so they can fit their family and belongings into it.

It’s very important to use sales that bracket the size of the home. This will give the most accurate indication of value.

This is especially true when considering the price per square foot. With everything else about a home being equal, a larger home will sell for less per square foot and a smaller one will sell for more per square foot.

You can see that if you only use larger homes or smaller homes and then apply that price per square foot to your home it can provide you with an inaccurate value indication whether it be too low or too high. This can result in leaving money on the table or the house sitting on the market for too long. 

Fact: Good comps will reflect square footage that is smaller, larger, and similar in size. 

2) School system – In the Birmingham, AL market where I work school systems are a major consideration for buyers. It is important that comps be in the same or similar school system.

If no sales are available in the subject’s neighborhood then it would be acceptable to look in another similar neighborhood within the same school system. Sometimes these sales may be further away, however, if the neighborhood is considered a competitive market area they should work.

A competitive market area is one in which a buyer would buy if none were available in the subject’s neighborhood. Homes would be similar in age, design, quality, and appeal. Distance is of secondary importance if all other factors are similar.

Fact: Good comps will in the same school system as the subject.

3) Condition – The condition of the sales comparables should be similar to the subject. This is a major consideration for buyers in my market.

Buyers will factor in how much work they will need to do to get their dream home in the type of condition they desire. If the home is not a turn-key type property then a buyer’s offer will reflect this and it is important to use sales that are in similar condition so the impact can be measured.

Some areas in my market are experiencing gentrification with homes being extensively remodeled. In cases like this, it is very important to know what type of condition the comps are in so that the subject’s price is reflected accurately.

Fact: Comps that are similar in condition to the subject will require fewer adjustments and provide a more accurate value indication.

4) Location – Location is tied loosely with school systems, however, there are other locational characteristics that are also important. Two homes may be very close to one another but be in two separate school systems.

A home’s location relative to employments centers, transportation hubs, and shopping/entertainment districts can have positive and negative influences on its value. Buyers are willing to pay more for a home that is located close to where they work because it cuts down on travel time and transportation costs.

Location can also have negative influences such as when a home is located next to an airport or interstate. The noise is not desirable therefore demand is lower and this is reflected in the price paid.

Of course, every place is different and the local perception must be measured in order to determine what type of adjustments must be made in the appraisal. There is no one size fits all adjustment because in one area there may be a negative perception while in another it may not be or the impact on value may be different.

Fact: Sales that are located in a similar area to the subject will reflect the local market’s supply and demand characteristics.

5) Features – The features of a home can and do influence its value so it makes sense that if you match up your subject with comparables that have similar features your value indication will be more accurate. Typically speaking, the closer in features the comps are to the subject property the fewer adjustments you will need to make and the more accurate the value will be.

Some features that influence value, no matter where you are, include the number of bedrooms and bathrooms, swimming pools, finished basements, barns, enclosed porches, extensive landscaping, and teenager or mother-in-law apartments among others.

Because it is so important to match up the subject and comps with similar features it may be necessary to go to another neighborhood for sales that have similar features. I am not saying to ignore sales from within the neighborhood but you can also look at additional sales from other neighborhoods that have more features like the subject.

Fact: Using sales that differ substantially in features will lead to an inaccurate value indication.

6) Time of sale – Using sales that have occurred recently will give you the best value snapshot of what is happening now. Real estate markets change due to economic factors so it is important to use the most recent sales to reflect this.

It is possible to use older sales if that is all that is available, however, it may be necessary to make a time of sale adjustment if things have changed. Again, the more adjustments you make the less comparable the property becomes so I always attempt to avoid using older sales.

Looking at homes that are under contract or pending may also be useful. If you do this it is important to use homes that are ready to close where financing, appraisals, and title work have already been completed. A property that went under contract yesterday would not be a good comp for obvious reasons.

Fact: It’s very important to use the most recent sales in an increasing market so that it reflects the high demand.

7) Quality – The quality of construction in a home can have a big impact on its value. Buyers pay more for hardwood floors, granite/quartz counters, crown molding, and other higher-end features of construction.

Since the quality of construction moves the needle on the value it stands to reason that the comps we use should have a similar quality, right? It takes more time and effort to browse through photos and verify information on the sales comparables but in the long run, it helps in the overall reliability of the value estimate you arrive at.

Quality of construction can be a subjective matter and therefore difficult to adjust for, however, if the sales comparables have the same quality then no adjustments are necessary. It becomes an issue when you use sales that have better quality than your property (because they are in the price range you think your property should be) and you need to adjust for it.

Isolating the value of the quality features I previously mentioned is very difficult contrary to what you see on the HGTV home improvement shows. Rather than add value for crown molding or granite counters why not use sales that have these features since the quality of construction is reflected in the sale price?

Fact: While the quality of construction can be subjective special effort should be made to match up the subject and sales as closely as possible in quality to get the most similar comps.

Question

Can you think of any other characteristics of good sales comparables? Please leave a comment below I’d love to hear your take on the subject. As always, thanks for reading.

If you liked this post subscribe by email (or RSS feed).