My Top 11 Tips For Realtors When Choosing Comps

11 Helpful Tips For Choosing Comps

Whenever I speak to agents about the real estate market and the appraisal process the one topic that the discussion always leads to is about choosing comps. It’s been said that choosing the right comps is ninety percent of the battle when pricing a home and I agree.

11 Appraisal tips for real estate agents

If you choose the wrong comps the home can stay on the market for an extended period of time. This can lead to larger than normal price reductions and stigma to the property that there is something wrong with it.

In situations like this, it is not uncommon for the house to sell for a lower amount than it would have had it been priced at a more accurate price at the beginning. In today’s market where so much information is available online, it’s important to put in the research upfront when pricing a home because we know buyers do and they will know when a listing is overpriced.

Today I’m going to share my top tips for choosing comps from an appraiser’s perspective. If agents can use the same techniques an appraiser uses the likelihood of there being a big discrepancy between the contract price and appraisal is reduced.

Top Tips For Choosing Comps

1) Don’t use basement homes when pricing a slab/crawlspace home (and vice versa)- When choosing comps the best advice is to choose properties that are as similar to your subject property as possible. The more different the properties are from one another the less comparable they will be and the less accurate your list price will be.

If you use basement homes as comps for a slab/crawlspace home you will need to adjust for the difference in the living area in the basement. This can be very tricky so it is best to stick with properties that are more similar.

There is no rule of thumb for the added value of a living area in a basement because it varies. Rather than take a stab in the dark about how much value is added in order to adjust the comp sale price it would be better to only use slab sales to price slab listings or basement sales to price basement listings.

When using two different types of properties you must also consider that each property may appeal to two different types of buyers. A person who wants to buy a slab home will probably not be looking for a basement home and vice versa.

2) Don’t use comps a lot bigger or a lot smaller- It is better to use sales that are only slightly larger and smaller than the home you want to price. If the sales you use are significantly larger or smaller your value estimate may be wrong.

It goes back to the idea that the more adjustments you need to make to a sale the less comparable it tends to be. As I stated previously you also must consider that the buyer for a much smaller or larger home may be different than the buyer for the home you are pricing.

This idea that you should pick comparables based on the same buyer profile is important because their motivations are similar and what they are willing and able to pay for the property will also be similar.

Finally, when making adjustments to significantly smaller or larger sales is necessary the adjusted value typically does not give the same value indication that a sale more similar in size will. The smaller home will usually give a lower value indication and the larger home will give a higher indication and the range of value provided by the sales will be much wider.

3) Use bracketing when choosing comps- The technique of using sales that are larger and smaller than the home you are pricing is referred to as bracketing. Using the living area to describe this technique helps it to be more easily understood, however, bracketing can be used with other features of the home as well.

Bracketing can be used with the size of land that a home is located on, the number of bedrooms and bathrooms, the age of the home, or any other feature that moves the needle on value. Using sales that are inferior, similar, and superior to the subject in some aspect constitutes bracketing.

The idea behind bracketing is that the inferior sale will be adjusted up, the superior sale will be adjusted down, and the comp that is similar will require little to no adjustments and the range of adjusted sales prices will be tighter, or closer together. Sales that provide a $5,000 range of value give a better value indication than a group that is $50,000 apart.

4) Don’t use sales in a different school system- No matter where you live, school systems play a big part in buyers looking to purchase a home. Parents want their kids to be in a school system that is highly rated, will educate them, and help to prepare them for higher learning if they choose to go that route.

Because buyers place so much emphasis on school systems, this feature is one that we should take into considerationSchool Systems and Home Values when choosing comps. As an appraiser, I can say that the school system is always one of the main search features I use when looking for comparable sales.

With that being said, if sales are not available, it is acceptable to consider sales in another school system IF the school systems are similar and a buyer would also consider the other school system. It goes without saying that other factors in the area should also be similar, such as economic factors, access to interstates, freeways, and style and quality of homes.

These “other” factors that I have listed and that should be considered are items that help us to determine if the properties are within the same competitive market area, which I discuss below.

5) Only use sales from a competitive market area- The competitive market area refers to the location that a buyer would consider if there were no available homes for sale in the subject subdivision or neighborhood. Typically, this area comprises homes that are similar in terms of age, quality, design, appeal, price range, school system, and transportation access points, among other factors.

It’s worth noting that the competitive market area may not necessarily be close in proximity to the subject property. There is a common misconception that comparable sales, or “comps,” must be located within a one-mile radius. However, this is not always the case.

Competitive Market AreaIt is possible that a competitive market area may bleed over into different school systems, however, it is important to make sure all of the other factors are similar as well. Comparing median and average prices for similar homes in different school systems can sometimes help you determine if school systems play a role in the price of homes and whether it would acceptable to use comps from the two different areas.

Sales from the same subdivision or neighborhood should always be the first choice when looking for comps. If that is not possible then look elsewhere but keep in mind that the other areas you look at should meet the definition of a competitive market area.

6) Don’t use sales from a superior area- At first, you may say “duh”, but the reason I am including it here is that I have seen it done before. Using sales from a superior area would violate my previous point of making sure that the sales you consider are in a competitive market area.

By definition, sales that are in a superior area would not be in a competitive market area. By superior I refer to the different features that contribute to higher sale prices of homes.

An area that has schools that are more highly rated than those in the subject area would be superior. Neighborhoods that have higher quality homes that sell for more would also be superior.

An important point to keep in mind is that the area should be a similar substitute for the area the home you are pricing is in. A question to ask yourself would be “Would a buyer for my home also look in this other area?”, taking into consideration home prices and other relevant factors.

7) Don’t use new construction sales to price an older home- As you would expect, new construction sales typically sell for more than older homes when everything else is equal. While this may be common knowledge to most it is important to keep in mind because the mindset of a buyer for a new home is different than that of someone looking at older homes.

New homes provide something that an older home never will and that is the fact that no one has ever lived in it before. This is a selling feature that many buyers will pay more for.

One obstacle that you must overcome if you were to use a new home as a comp for an older home would be the calculation of depreciation. Depreciation is the wear and tear a home receives when it ages.

A negative adjustment would need to be made to the new construction sale that reflects the difference in value between the two properties. Again, this would require more in-depth appraisal skills that agents most likely do not possess, which is understandable.

Even if adjustments could be determined by the agent, the new construction sale probably would not provide the best indication of value compared to another sale that was closer in age to the subject property

8) Don’t use sales with far superior features- In a perfect world there would be at least 3 recent sales of homes identical to the subject on the same street that we could use in our appraisal report. Because it is not a perfect world we need to use the best sales that are available to us.

When searching for comparables we start the search using a tight range of variables such as size, quality, location, and features to name a few. If we do not have enough sales to develop an accurate and reliable opinion of value we may need to expand our search parameters, within reason of course.

It’s important to keep in mind that the more adjustments that need to be made to a sale the less comparable it is. Using sales that require larger-than-normal adjustments contributes to less reliable value estimates.

9) Don’t price a home without knowing its accurate square footage- Knowing the accurate square footage of your subject property is something you do prior to choosing comps, however, it is a very important part of the process. IfSquare Footage is Key in Accurate Pricing you don’t do this in the beginning then the comps you eventually use may not be very comparable.

There are several different ways to get accurate square footage, which I have covered in prior blog posts, so I won’t cover that in depth here. Remember what I mentioned previously about choosing the right comps being 90% of the battle? You can’t choose the right comps if your search is based on the inaccurate square footage of the subject property.

Based on the information I have looked at in my local MLS when the square footage for a listing is accurate its days on market are fewer and the final sale price is closer to the list price.

10) Consider pending sales and active listings- Closed sales provide historical context to what other similar properties have sold for. With the passage of time, things change such as supply and demand, which includes the seasonality of sales throughout the year.

These changes in the market can be adjusted for, however, in addition to closed sales, we can also look at active and pending sales. Active listings provide a good indication of the competition for similar homes.

With active listings, we can look at how long they have been on the market and whether there have been any price drops. This information will tell us if the price we are considering is too high.

Pending sales that have been appraised with no issues and that have financing in place are the best sales available. These sales provide us with an accurate picture of the current market with no need to adjust for time or market conditions.

11) Only use sales 90 days or newer if possible- Using the most recent sales always provides the best indication of value because they take into consideration what is happening in the current market. The older a sale is the less comparable it may be due to changes in the market.

While it is possible to adjust for market changes, why introduce more uncertainty into your price estimates? If more recent and similar sales are available there is no need to use older sales.

As I stated previously, if agents can follow the same methods that an appraiser does when choosing comps there is less likelihood that there will be large differences between the final mortgage appraisal and the contract price. Appraisers will use the most recent sales available so it stands to reason that agents should do this as well.

Conclusion

These tips for choosing comps are the ones that come to mind immediately. Can you think of any others? If you have any questions about choosing comps or need help in pricing a listing with a pre-listing appraisal feel free to contact me and as always thanks for reading.

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Comments

  1. I like your blogs & your expertise. I am in SOCAL, far far away from Alabama, but almost all rules & tips are applicable. I enjoy reading them & updating myself in RE market.
    Thanks & more power Tom!

  2. #9… Don’t misrepresent the square footage of the home! I enjoyed the blog, Tom. Lot’s of great information here!

  3. I especially like point #10. We see the current market in the pendings and listings that are moving. Sales tell us what the market used to be like when these properties got into contract? What’s the market like right now? Let’s look to the pendings in particular (but not basing our entire perception of value or the market on one lone ranger pending either).

  4. Common sense then. Glad you are putting this out there for the agents as bracketing is something they rarely in my experience.

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