How Much is This Home Worth?
When you finally find “the one” you want to purchase, or if you are thinking of putting your current home up for sale, the number one question you may be asking yourself is: What is this home actually worth?
If you are a seller, you want to ensure you price your home appropriately so that you get top dollar when you go to list.
If you are a buyer, you want to understand the value of a home so you can make an appropriate offer to purchase the property. You want to make sure you do not overpay.
In both instances, a real estate agent will pull “comps” to help you determine the right price for either scenario.
What are “Comps”?
Comps is short for “comparable sales”, which is a home that sold recently near the “subject property” (the home you want to know the value of). In other words, the value or the market price of a property is determined by analyzing homes in the surrounding vicinity that have recently sold. When agents pull together several “comps” into a report to find the value of a home, that report is referred to as a “CMA” or a Comparative Market Analysis.
When pulling comps, it’s really important the agent compares apples to apples and oranges to oranges. The home you are referencing as a “comparable sale” should be very similar in size, location, features, and condition. When I sit down to price out a property, here are the primary criteria I start the process with:
Location - Generally speaking, I tend to stay within 1 mile of the subject property. Closer if possible.
Square Footage - I tend to look within a range of 15% +/- the square footage of the subject property.
Bed and Bath count - I start my search with a strict matching of the subject property’s bed and bath count.
Time frame - It’s always best to go with the most recent sales. Depending on the amount of sales activity, I begin the search looking at sales within the past 3 months but I will extend up to 6 months on occasion.
How are comps used in real estate?
We’ve already mentioned how sellers use them (to price their property for sale), and how buyers use them (to determine how much to offer when trying to purchase a home), but it’s important to note that comps are also used by appraisers. Before a bank lends money to a borrower for a mortgage, they want to ensure the property they are lending against is worth the loan amount. If you are a buyer using a loan to purchase a home, at some point during escrow the bank will assign an appraiser to come out to the property to see it in person. They review the features and the condition of the home, and then they look at comps in the neighborhood. They create a report called an “Appraisal” which lists the comparable sales they used to determine the value of the home. This report is submitted to the bank and the lender.
Let’s say you enter escrow on a property for a purchase price of $800,000, but the appraiser determines the value of the home to be $775,000. There is a $25,000 gap in the amount you agreed to pay the Seller, and the amount the bank is willing to lend. There are several solutions to this problem, but generally speaking, here are some common resolutions:
The buyer comes out of pocket to close the gap
The seller reduces the purchase price to close the gap
The buyer and seller meet somewhere in the middle, with the buyer putting forth additional funds and the seller slightly reducing the purchase price
It’s important to note that you may refute or contest the appraiser’s report and it may sometimes result in a second appraisal or a review of the original appraiser’s analysis, but this is an uphill battle and does not often work.
Where do you find comps?
Generally speaking, the MLS (The Multiple Listing Service) is the best source of comparable home sales, because the information is very accurate. Any experienced agent should be well-versed in navigating the local MLS and finding good comps for the subject property. The MLS is not a public search tool, and your real estate agent should have access to it.
Comps may also be found by accessing public property records from the county, or popular syndicated sites like Zillow. Beware, though, I have seen inaccurate data reported on Zillow. The best way to get comps, or a Comparable Market Analysis, is to reach out to a seasoned real estate agent and request they perform the comps analysis.
Tips To Analyze the Comps
Only reference sold homes. You can check out the competition by looking at active sales, but at the end of the day, a home is only worth what someone is willing to pay.
Apples to apples! Do not compare a single-family residence to a condo or a townhome.
Once you’ve narrowed down the pool of comps using size, location, bed/bath count and the date it sold, you have to carefully review the pictures and analyze finishes and the features of the home. Your next-door neighbor’s home may be identical to yours in terms of layout and bed/bath count, but the value could be significantly higher if they renovated their kitchen with marble countertops, a new island, installed a second oven and custom wood cabinets.
Read the descriptions of listings to see if the listing agent mentions any new renovations or upgrades to the home’s major systems (i.e. a brand new roof, or a new HVAC unit installed).
It’s an Art, Not a Science
This is important! Accurately pricing a property takes skill and expertise. It’s not as easy as going to Zillow and finding similar properties using their search filters and then averaging out the sold price. I went into detail in this article about some methods used to find comps, but there is much more nuance to it than I articulated. I strongly suggest relying on an experienced real estate agent to find comps and then review the report with them so you understand their logic. A good agent has been out in the field, touring these homes in person. Sometimes (ok, most of the time) pictures can be deceiving. Increasingly, agents are relying on Photoshop and wide lens photography to make rooms feel more spacious and clean than they truly are. Also, a good agent will have their finger on the pulse of current buyers’ trends and tastes. Particular features or architectural styles may command more of a premium than others, even though the fundamentals of a property appears to be very similar. My suggestion to you as either a home buyer or a home seller is not to perform the comps yourself, but now that you know what a “comp” is and how important it is, make sure you are working with an agent who is competent and experienced in pulling comps and feels comfortable in walking you through their analysis. While buying and selling a home is an emotional process for most people, it’s important to also rely on some hard data and feel confident in what you are paying for a home or the price you are willing to sell it for.