What Makes a Good Comp?
Pricing a listing correctly is one of the most critical skills a real estate agent can develop. List a home too high, and it sits on the market, developing a stigma that can lead to lowball offers. List it too low, and the seller may leave money on the table. To get it right, many agents rely on a Comparative Market Analysis (CMA), but appraisers take this process a step further by applying specific guidelines when selecting comps (appraisal comparable). Understanding these guidelines can help you price homes more accurately and prevent surprises when the appraisal comes in.
The Appraiser’s Approach to Selecting Comps
Appraisers don’t just pick sales that seem similar; they follow a structured approach based on lender requirements, market trends, and the principle of substitution (buyers will not pay more for a property when a similar one is available for less). When choosing comps, appraisers consider the following:
1. Proximity Matters
The best comps are as close to the subject property as possible. Generally, appraisers prioritize:
Same neighborhood or subdivision whenever possible.
Similar school districts, especially in areas where schools significantly impact home values.
Within a similar competitive market area (if no sales are available in the subject’s neighborhood or subdivision): ie, an area with similar quality, style, and price range of homes.
Within a reasonable distance if possible, however, this is not a hard and fast rule if it is a competitive market area.
2. Recency of Sales
Markets can change quickly, so appraisers focus on recent sales to ensure the most accurate valuation. The best comps:
Have sold within the last 90 to 180 days (preferably within three months if possible).
Are adjusted for market trends if older sales are used.
Exclude outdated or distressed sales unless they reflect the true market conditions.
3. Similarity in Property Characteristics
Appraisers compare properties with similar features to ensure accuracy. Key elements include:
Square footage – Ideally, comps should be within 10-20% of the subject’s size.
Lot size – Large variations in lot size require significant adjustments, making a comp less ideal.
Number of bedrooms and bathrooms – Properties should have a comparable bed-bath count to be considered truly similar.
Construction quality, age, and condition – A home built in 2023 is not truly comparable to one built in 1950, even if they have the same square footage. If older, renovated sales are not available for an updated home it may be necessary to compare it to a newer home with a a similar effective age.
Design and appeal – A home that is very unique in its design and appeal may not compare well with a more traditional home. Sometimes it’s not possible to find an exact match, however, an attempt should be made to locate similarly unique properties.
4. Similar Sales Type
The motivation behind a sale affects its price. Appraisers prioritize:
Arm’s length transactions – Sales between unrelated parties at market value.
Excluding distress sales – Foreclosures, short sales, and estate sales often don’t reflect true market value.
Private or Off-Market Sales – They can be used, however, the terms of sale should be verified.
5. Adjustments for Differences
Even with the best comps, no two homes are identical. Appraisers adjust for differences, but here’s where agents often ask: “Can you give me an adjustment cheat sheet?”
The answer? No, because adjustments vary based on:
Location – A pool in one area of town adds more value than a pool in another area.
Quality and condition – A newly remodeled kitchen in a high-end home adds more value than one in a starter home.
Market reaction – Adjustments are based on what buyers in that market are willing to pay for a feature, not on a universal formula.
How Agents Can Use This Knowledge for Better Pricing
Understanding how appraisers select comps helps agents create more accurate CMAs that will hopefully decrease the chances of there being significant differences between the eventual contract price and appraisal value. Here’s how you can incorporate these principles into your pricing strategy:
1. Choose Comps Like an Appraiser
When running a CMA, follow the same principles appraisers use. Stick to sales within the same neighborhood or a competitive market area if possible, and similar property characteristics.
2. Question Outliers
If one sale is significantly higher or lower than the others, investigate. Was it a distressed sale? Was there an off-market deal or seller concessions? Don’t let one outlier skew your pricing strategy.
3. Use Active and Pending Listings Cautiously
While appraisers focus on closed sales, active and pending listings help us to understand what is happening with current market trends. However, just because a house is listed at a high price doesn’t mean it will sell for that amount. Look at days on market and price reductions to gauge realistic pricing.
4. Know the Impact of Market Conditions
Markets shift. If prices are rising quickly, older comps may be lower than current values. If the market is declining, sellers may need to price aggressively to stay competitive. It’s important to know what direction the market is taking.
5. Prepare for Appraisal Challenges
If an appraiser uses different comps than you did in your CMA, don’t panic. Review their report objectively and be prepared to explain your reasoning with solid data. If needed, provide additional sales that support your pricing, but ensure they meet appraiser guidelines. It goes without saying that sharing your sales with the appraiser upfront is better than coming in after the appraisal is completed. When this happens you will need to go through the lender and complete a reconsideration of value (ROV).
6. Educate Sellers on Realistic Pricing
Sellers often want to price their homes based on what their neighbor’s house listed for or what they need to net from the sale. Use appraiser guidelines to show them what buyers (and their lenders) will be looking at when determining value.
Final Thoughts
By using appraisal principles in your pricing strategy, you can avoid overpricing mistakes, set realistic seller expectations, and reduce appraisal challenges down the road. While there’s no “cheat sheet” for adjustments, understanding how appraisers evaluate comps can make you a more knowledgeable and effective agent.
If you have any questions feel free to reach out to me. The more you base your listing price on current market data, the smoother your transactions will be for both buyers and sellers. As always, thanks for reading.
I find some people in real estate think any sale is a comp, but just because it sold doesn’t mean it’s comparable. Imagine me looking at the sale of a car in a neighbor’s garage and calling it a comp just because his house is next door. It could be wildly different.
Exactly, Ryan. That is a great comparison. I think it goes back to the principle of substitution. Would the buyer reasonably choose the “comparable” if your home was not available. Using your example, if the house next door had a Lamborghini but you had a Yugo would that be a good substitute? I don’t think so.
Hi Tom,
Good post. I put together a presentation for agents walking through examples of how I pick comps and my process is similar to yours. The only thing I would add is to remind agents not to use price per square foot as their metric. It’s easy, and wrong, to say that a 2,000 sf house should sell for the same PSF as a 1,000 sf house.
Thank you for the great feedback, Joe! I’m glad you found the post helpful. It’s awesome to hear that your process is similar to mine – sounds like you’re doing a fantastic job educating agents. You’re absolutely right about price per square foot. It’s a common trap, but comparing PSF between different-sized homes can be misleading. A 2,000 sq. ft. house is typically going to be priced differently than a 1,000 sq. ft. home, not just because of size but also due to other factors like layout and amenities. I really appreciate you pointing that out – it’s such an important reminder for agents to consider the full picture when choosing comps. Keep up the great work!
Thanks Tom, yes agents need this list. Yesterday an agent gave me a “Comp” with GLA 4 x the subject’s. Price seems to be the only thing most of them are looking closely at.
Thank you for your comment. It’s so true – too often, agents focus primarily on price without considering other crucial factors like Gross Living Area (GLA). A comp with 4 times the GLA of the subject property? That’s a big red flag! While price is important, it’s the other details—like size, condition, and features—that really make or break a solid comp. I’m glad this list can help shed some light on those factors, and I hope it continues to be a valuable tool for agents. Appreciate you sharing your experience.