What makes a good sales comparable?

A guide to choosing a good sales comparable

As an appraiser, I speak a lot at real estate agent’s offices. One of the most popular questions I get is how to choose a good sales comparable.

This may seem like a very basic question to an appraiser but it can be confusing to an agent. If agents and appraisers can both be on the same page about how to recognize the best sales comparable then our values will line up more closely. This will help agents price listings more closely to the market, which will help reduce the likelihood that homes will not appraise once the go under contract.

While I’ve never really seen an official definition of what a sales comparable is for purposes of a CMA or an appraisal, Merriam-Webster does define comparable as the following:

COMPARABLE
1 : capable of or suitable for comparison

That really doesn’t give us a lot to go on so I thought I would share with you my thoughts on what constitutes a good sales comparable. If you are an appraiser and have something you would like to add, please do. If you are a real estate agent and have a question about what makes a good sales comparable, please leave a comment below.

Characteristics of a good sales comparable

1) They bracket the subject- I’ve written about bracketing in past articles so if you are interested in digging deeper please read that post. In general, bracketing consists of using sales that are superior, inferior, and approximately equal in comparison to the subject.

The easiest example to illustrate this is when bracketing the square footage of the home. You’ll want to choose comps that are around 10-15% smaller, larger, and then one about the same.

If there are not enough comps then you can slowly increase the percentage. The idea behind bracketing is that after you make positive adjustments to the inferior comps, and negative adjustments to the superior comps, and little to no adjustments to the comp most similar to the subject, then they will provide a tight and reliable range that you can then reconcile a final value.

Keep in mind that you don’t want to include just the sales that are superior to the subject property. Including inferior properties can also help give context to the market value of a property.

2) They are arm’s length transactions- An arm’s length transaction is one that was not adversely affected by duress. Examples of this would be divorce, foreclosure, etc. A sale that was subjected to this type of motivation will typically sell for less and may not reflect true market value.

The only time you might want to keep this type of sale would be if they were typical in the market. During the recent housing recession foreclosure sales could not be ignored because they were the norm in both sold properties and active listings. The only time you would want to ignore them is if they were not typical and would not reflect true market value.

3) They are similar in location- The old saying about location holds true when choosing a sales comparable. The ideal situation, and where I begin my search, is the subject’s subdivision. The goal is to choose sales that are subject to the same locational, economic, and physical characteristics as the property you are attempting to value. If no sales exist within the subdivision then searching nearby neighborhoods is the next step.

Again, if there are little to no sales then you will need to expand your search parameters. The thing to remember is that while distance can be a relevant search characteristic it should not restrict you from choosing sales that compare favorably to your property.

If you have to look for sales further away, that is okay. Just keep in mind to stay within areas that a buyer for your subject property would also look. Things to consider are the school system, the price range of homes, style and quality of construction of homes, and access to nearby neighborhood support services. If you can match the location in this way then it would be considered a “competitive market area”, which is a better way to describe where you should look compared to just saying subdivision or neighborhood.

4) They have similar construction quality- Buyers tend to compare homes based on their affordability criteria, and quality of construction is one of them. Higher quality homes typically cost more and this can prevent a buyer from purchasing it.

A home that would appraise for $150,000 should not have comps that are selling for $250,000-$300,000. If a home of higher construction quality is used for some reason then an adjustment would need to be made for the difference, however, these types of adjustments can be difficult to quantify so it is best to use homes of the same quality as the subject property.

5) They are in similar condition- The condition of the sales comparable is important also. Like construction quality, the condition should be similar to that of the subject.

Again, you need to ask yourself if a buyer was looking to buy a home in a certain condition would they consider a home that was in worse condition? What about the cost to fix the home and put it in normal condition? If a home that is in inferior condition is used as a comp then an adjustment for the difference in condition should be made, and like construction quality, this can be difficult to quantify.

6) They occurred recently- Using sales that have recently occurred will guarantee you that they reflect what is currently happening in the local real estate market. It is important to recognize that the market can change over time based on local economic conditions.

An example that comes to mind occurred many years ago when I was appraising a home that was located in an area where a large company had moved out of town. The company employed a large number of people in town that now had to make the decision to either relocate out of town to where the company was moving or possibly move to a more affordable home.

Using older sales to appraise this home would not have taken into consideration the current market and the number of homes that currently went on the market for sale due to the company moving. If a market is stable with little to no change then it may be okay to use older sales but this must be considered on a case by case basis.

7) Comparables can also be a listing or pending sale- One thing to keep in mind is that competitive listings and pending sales can also be considered. To be clear, it is important to keep in mind that closed sales should always be included but in addition to the sales active listings and pending sales can also be considered.

An active listing can provide insight into what other competitive properties are in competition with the subject property. Pending sales can give a snap shot of what is currently happening, especially if the sale has gotten approved financing and been appraised and is just waiting to close.

8) They are similar in size- To give the most accurate indication of value the sales comparable should be of similar size to the subject. As I noted in #1 the comps should bracket the subjects square footage within reason.

You do not want to choose a sale that is 1,000 square feet larger or smaller than the subject because you will need to make larger adjustments. The larger adjustments you need to make the less accurate and reliable the value estimate will be.

9) They have similar land value- Notice I didn’t say land size? The best case scenario is that the sales comparable will have similar land size and similar value, however, if there are variations in size that is acceptable as long as the contributory value of the land is similar to that of the subject.

This will avoid any adjustments that will need to be made to the sales comparable thereby making it a better indicator of value. Keep in mind that if you have to use sales with different land size and value that is acceptable but not ideal. It will be necessary to determine what effect the differences had on the sales price so that an adjustment can be made.

10) They have similar features- The last thing I would like to mention is that the sales comparable should have similar features as the subject. Or put another way, the comp should not have a feature that the subject property does not have.

My go to example here was a property I appraised years ago that did not have a pool but one of the comps the agent used to compare it to had an in-ground pool. Again, this is not deal killer, especially if there are no other comps available but it is not preferable.

You would need to know the contributory value of a pool to make an accurate adjustment and many times agents do not have this information. In situations like this, it is preferable to pull comps from a competitive market area that may be further away but that has more similar homes.

Conclusion

As you can see, there are many factors that go into choosing a good sales comparable. It is more than just picking the three most recent sales occurring in the neighborhood. It is a combination of the various factors I have discussed here.

Question

So do you think these tips on choosing a good sales comparable will be helpful? Do you have any other questions? Whether you are an agent or an appraiser please share your question or opinion in the comments section below and as always thanks for reading.

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