7 Ways Not To Choose Comps

How Not To Choose Comps

If you are a real estate agent and want to learn the best ways to choose comps then this article is for you. Sometimes the best way to learn how to do something is to learn how not to do it.

I hope you find value in this and in the end, I hope it helps you to choose comps with more confidence than you did before.

How Not To Choose Comps

7 Tips For Choosing Comps The Right Way

1) I’m taking what I think the home is worth based on the owners estimate and looking for sales in this price range- If you go into the situation with a predetermined idea of what you think the home is worth you will most likely find sales that support that value.

Choosing comps by price alone will not give you a reliable value estimate. The most reliable way to develop an accurate value estimate is to choose comparables based on the physical attributes of the property.

This would include things like square footage, age, bedroom and bath count, and features of the home such as pool or barn. By searching for sales based on the subject’s features along with its location you will develop a value that is market-driven.

2) I’m looking for the highest-selling homes and then adjusting for differences- If you have a house that you are trying to value and it has very nice features and quality you may think that it should sell for the highest amount in the neighborhood

To attempt to estimate its value by using only the most expensive homes in the neighborhood may not be wise. As I said in #1 if you think a home is worth a certain amount you will most likely find sales to support it.

This method for choosing comps goes against the bracketing method. This method for choosing comparables suggests using comps that are inferior, similar, and superior to the subject. This “bracketing” helps to provide a more accurate value estimate.

3) I’m comparing my 10-year-old home to all new construction- New construction homes get a little extra boost in marketability and sale price just because they are new and most people like new construction because no one has lived in it before.

Of course, you also have the depreciation factor which is the loss in value by aging and other factors. While it is okay to consider some new homes as comparables it is not wise to use all new homes.

The new construction homes will typically sell for a higher amount when everything is the same with the exception of the age. Older homes in more distant competitive market locations should be used also to factor in age and depreciation if none are available in the subject neighborhood.

4) Using higher sales from another neighborhood when there are good sales within my own subdivision- There is no better way to ruin the legitimacy of your valuation than going to a more distant neighborhood to get high priced sales when more similar lower-priced homes are in the subject neighborhood.

The subject’s neighborhood should be the first place to look. If there are recent sales that are similar to the subject then these sales should be the ones used in the valuation.

Agents should attempt to use the same methods that appraisers use when choosing comps and stay within the subject subdivision when good comps exist. If they do this then the likelihood of the contract and appraisal being far apart is greatly reduced.

5) Using new sales from within your neighborhood even if they are not similar to yours- Choosing comps is not always a cut and dried matter. Each sale must be looked at and considered on its own merit.

The most recent sales are not always the most similar. While the time of sale can be important it is not critical if the physical characteristics of the sales are vastly different.

All of the factors must be weighed against one another so that overall differences are minimized and the sales that are most similar to the subject are used in order to provide the most accurate value estimate.

6) Using price per square foot- Price per square foot should never be the de facto metric when pricing a home. It is better to use it in combination with other value indicators to reconcile a final value.

The price per square foot takes into consideration many features of a home and unless the comps are near identical to the subject it can provide a wide range of values. Choosing the most similar comps is critical when looking at the price per square foot.

A larger home that is similar in all other features will typically indicate a lower price per square foot than a smaller home. A home with a finished basement will sell for more per square foot than one with an unfinished basement.

These are just two reasons why it is important to choose the most similar sales to make sure that the price per square foot stat is a good indicator of value.

7) Not considering pending or active listings- In addition to closed sales active and pending sales can provide good value indicators. Depending on different factors they will need to be reconciled against the closed sales, however, they can provide support for the closed sales value indication.

Not all pending sales are the same, however.  A pending sale which has been signed by both parties that agree on the contract amount, that has received a good title policy, and appraises for the contract price or more, is a better pending sale than one that just consists of an offer by an interested buyer.

Again, all weight should not be given to pendings or listings, however, they can be factored into the value “picture” along with the closed sales

Question?

Do you have any other questions about how to choose comps? Leave a comment below and I’ll do my best to answer it. As always, thanks for reading.

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Comments

  1. Nice job Tom. It’s so true about pendings and listings. Sales are historical documents that tell us what happened in the market in the past when these properties got into contract. What’s happening today? We must look to current activity found in listings and pendings.

    • I totally agree, Ryan. Whenever I talk at agent’s offices and mention pending sales there’s always an aha moment. I don’t think they really consider them but if used with the other sales information they can provide some good insight.

  2. Mark Ziegler says

    Nice Tom,
    This is great stuff for agents that, in many instances, doesn’t get imparted. However, given the amount of review work I do and, sadly to say, many appraisers could stand to read this and refresh themselves on what they think they do for a living.

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