The process of capitalism teaches us that the value of any good is assessed by the amount that a buyer is willing to pay to obtain it; and so it is with housing. With new homes, that amount is largely influenced by the materials used in the construction and outfitting of the home, the value of the land on which the home sits, and the cost of the labor hired to enact the actual construction. With used homes, the valuation is not so clear cut, so the value of these homes is typically assessed using a real estate tool known called a “comparable,” popularly known as a “comp.” Today we’ll discuss the nature of comps, and how they are used in the home buying (and selling) process.
What are comps, exactly?
Comps are data collations that give a good idea of what the going market rate is a for a home of a particular size, offering particular amenities, in a particular area. The reports are called “comparables” because they pull information on sales of homes comparable to that which is being sold (or bid upon by a buyer).
Where does the information come from?
Information on recent sales is pulled by an agent or a buyer from a real estate listing service, such as the “Multiple Listing Service,” also known as the MLS. Researchers can create reports based on comparable sales in a target area, for a targeted size of home, then use that information to establish a sales price (or bid) most likely to reflect current valuations. Whether these prices are too low or too high are influenced by a variety of factors, including consumer demand.
How do researchers decide which homes to use in the comps?
Anyone assembling data for comps has to use what is available; this means that in areas with relatively low sales volume, the comp data will be heavily influenced by the few sales that have occurred. In most cases, however, sales are frequent enough to reflect the true value of a home in a given place. Comp data will be composed of recent sales information for homes that most closely reflect the home for sale: square footage, number of bedrooms, size of lot, amenities like a pool, and even the quality of the local school district.
What’s the best way to use a comp?
Comps can be assessed in a number of ways, but one useful barometer is the “cost per square foot” for homes in a given community. For example, if the comps show that average cost per square foot in a certain neighborhood is $245, but a particular home is listed at over $300 per square foot, a buyer would want to examine the reasoning behind the increased price and decide whether or not the cost makes sense. Sellers offering relatively typical homes in a neighborhood can also use the price per square foot as a launching point for setting their sales price, deciding whether or not that price should be raised or lowered as appropriate for the size and condition of their own property.
Are there any drawbacks to comps?
Comps are a straight-forward and easy to understand tool for valuation of property, but anyone using a comp should be sure that the comp is both recent and properly compiled. Values and pricing shift often in real estate—sometimes seasonally, sometimes month-to-month—so an outdated comp can give an inaccurate picture of the state of the market. Likewise, comps that don’t adequately cover recent sales (or that include sales of dis-similar homes) may also give skewed results. Prepared properly, however, a comp can give both buyers and sellers a good idea of what a home is truly worth.