Agents, are you verifying your comps?

Verifying Comps Is Critical For Accurate Pricing

The real estate market is red hot. It’s not just in the Birmingham area but all across the country.

Low-interest rates and limited inventory have contributed to increasing prices fueled by multiple offers on houses that are often over the list price. The question is how do we wade through all of the sales data and make it meaningful to help in pricing a home for sale?

I thought it might be helpful to share how appraisers verify comps so that real estate agents can take the same steps to make sense of the sales they are using in their CMA‘s. By doing this they’ll get a better idea of what they can price the property at.

You may look at a property that sold for a high amount recently and price your listing close to that but is that always the smart thing to do? By digging deeper you may find out why it sold for what it did and this may change your mind about the price.

So you may be wondering about what you should be looking for. I’ve included six things to consider when reviewing sales.

6 Things to Consider When Reviewing Sales To Price a Listing

1) Sale Price – The first thing to verify is the actual sale price. Most of the time the MLS has accurate information, however, I ran across a sale recently that was not recorded correctly. The sale price shown in the MLS was around $10,000 higher than what it actually sold for, which is significant.

Most counties have all of their public records available online which makes this easier. I would encourage anyone interested in this to become familiar with where documents are recorded and how to search for them online.

2) Buyer Contributions – When looking at what a property sold for it is important to know if the buyer had to contribute a significant amount of money to make the deal work. If a property does not appraise for the contract price and the buyer still wants the home they can pay the difference, however, that does not mean the home is worth what they ended up paying for it.

It is important to keep in mind that what one person is willing to pay for a home does not always equate to its market value. The market value of a home that is determined from an appraisal considers what the majority of buyers would pay for a property rather than an individual who is super motivated.

Discussion of these types of sales leads us to the next thing to consider and that is whether the sale is an outlier.

3) Outliers – An outlier sale is one that does not fit within the trend of value for other similar properties. An outlier could sell for more or less than what the majority of other properties are selling for.

As I described in the example above, a buyer could be very motivated to buy a property so they might end up paying more than what other comparable properties are selling for. You may also have a seller who is relocating and must sell quickly so they price the home below market to move it fast.

Outlier sales must be considered in the context of other sales to determine if they should be considered. If they are not the norm then they should probably not be used as comps.

4) Appraisal Waivers – An appraisal waiver, also known as a property inspection waiver or PIW, is sometimes used to bypass the appraisal in a purchase transaction. The use of a waiver may be based on a buyer’s good credit or whether they are making a large down payment with the amount financed being a fraction of the sale price.

Because there is no appraisal there is always the possibility that the sale price is above market value. Had an appraisal been done and it was discovered that the contract price was higher than the appraised value there is the possibility that the contract would have been negotiated down to the appraisal amount.

I would advise anyone to proceed with caution when using a home that sells for what appears to be over market value and that had an appraisal waiver. This type of sale may not reflect what the majority of buyers would pay for the same property because it does not have the benefit of an appraisal to determine how the contract price compares to what other similar properties are selling for.

5) Appraisal Contingencies – I have written about appraisal contingencies in the past so if you want to learn more you can read that post. The short explanation is that an appraisal contingency allows a buyer to get out of the deal if the home does not appraise.

If there is no contingency and the home does not appraise the buyer must still honor the contract. They will most likely have to pay out of pocket for the difference.

The final sale price may not reflect the market value as determined through an appraisal and would not provide a good indication of value for another similar property.

6) Cash Sales – Because cash sales do not require an appraisal there is always the possibility that the price paid may be over market value. A higher than normal sale price should trigger you to check whether it was a cash sale and if it was to question whether the price is a realistic value indicator.

7) Square Footage – It is important to know whether the square footage shown in the MLS is accurate. If it is not it may result in pricing your listing inaccurately. 

What if the sale is larger than what is shown? This could result in pricing your listing too high because you think the homes are similar but in reality, the sale is larger than your listing.

The local Greater Alabama MLS shows the source of square footage data which can help determine the reliability of the information. The most accurate source would be from an old appraisal or house plans (for new construction). The least reliable would be county records.

I actually did a study (which you can read here) to compare the final sale price to the initial list price and the days on market (DOM) for homes based on the source of their square footage data. The listings that had the most accurate square footage sold quicker and closer to the original list price.

When choosing which sales to use as comps to price a listing the above items should be considered. They will help you determine if the sales can be relied upon to provide a good indication of value for pricing your listing.

Question

Can you think of anything else to consider when verifying comps? If you have any questions please leave a comment below and as always thanks for reading.

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