2 Important Facts About Real Estate Comparables or Comps

Is this house worth $100k or triple that? Local comps will tell you.

Comparable are Comparison Tools

Real estate comps are comparison tools. Part of sourcing comps is looking at what's sold within the past several months. A house that's much larger or smaller, much more or less appointed, or that differs substantially from the property in question can't be a comp. And if you know the value of a house but it hasn't been on the market in a year, it's also not a comp.

So if the house in question - the one that you want to buy or sell - is a 4-bedroom on a quarter acre, a 2-bedroom duplex with a postage stamp yard is definitely not a comp. But another house in the area with 4 bedrooms and smaller yard could be.

The goal is to find the closest match possible, one that's in a reasonably similar location, that was sold no more than a year ago. In some cases, especially in a slower market, 2 years back is ok. But it's not ideal.

Buying and selling real estate involves a lot of research for appraisers, agents and you.

Comps are Vital to Real Estate

The dominant reason why comps are so important is pricing. Appraisers provide market value information to lenders. They don't pull a home value from thin air, and they don't measure the value of a house only on its physical characteristics. That's why a modest bungalow in one part of the country might cost $50k, while in another location it might be valued at 4 times as much or even more. Location matters, so viable comps have to be nearby.

Real estate agents will typically tell sellers or buyers that they need to look at some comps, the same as appraisers do. But while an appraiser needs comparables for the lender's benefit, agents use them as a buying or selling tool. They help with pricing a home accurately, says David Whisnant of Real Estate Investing Club (REI) and they also help buyers understand whether a house is priced fairly for the area.

Appraisers and agents want a good supply of comps in order to select the best. Both professionals have reason to find good comps, so it's in the buyer and seller's best interest to trust their assessment. There's practically no reason why either party would opt for lower-valued comps over better ones. Agents might settle on a higher value than appraisers, but Bankrate says that's because agents know the area and motivations of buyers and sellers in a way that appraisers don't.

Comparables are the accepted method of determining a fair market value. But there's a problem that not everyone agrees about. Where there are a lot of foreclosures, the undervalued sales affect surrounding property values negatively.

That doesn't seem fair to a lot of people, since one person's bad financial fortune shouldn't affect someone else's house. But the proponents say that it is fair because it's indicative of the market climate. That goes back to the reasoning behind why the same house in different parts of the country would vary dramatically.

The value of your house doesn't rest squarely on every other house in the neighborhood. If yours is newer, larger, or otherwise different from others that have fallen into foreclosure, those homes wouldn't be comps to begin with. The search for comparables begins with evaluating your house. From there, your agent and ultimately the appraiser will source homes that are as close as they can come to get the most accurate value picture.

If you're thinking about selling your home, getting a reasonably accurate picture of its value is the first step. Through eppraisal, you can do that before ever calling an agent. Get a free property valuation today, and see how your home compares to others in the area.