The Real Estate IQ glossary keeps growing! This time, we’re about to discover what comparables – or comps – are in real estate. You might have an idea since the word is pretty self-descriptive. Comparables are a mechanism to obtain the fair value of a property. They consist of comparing recently sold houses with others that haven’t been assessed yet.
Though it looks like quite a simple process, there are some considerations to take into account. In general, the properties should be similar and should have been sold within the last few months. When you’re running comps, what you’re actually doing is a comparative market analysis (CMA), and the result you obtain is known as the ARV, or after repair value.
How are real estate comparables determined?
The first thing to consider when running real estate comps is the properties’ features. Since what you’re looking for is a price as accurate as possible, the assets you compare must be similar to one another. Hence, these are some of the aspects that should match:
- Year built
- Square feet
- Rooms, bathrooms, and stories
- Neighborhood
- Amenities
- Property type (all single-family homes, all condos, all townhouses)
We know it isn’t easy to find identical houses, but try to spot those that resemble the most. Look for properties within about a one-mile radius from the one you’re evaluating, with a similar number of rooms and bathrooms, and with a year-built difference of more or less than 10%. Typically, a real estate agent chooses around three homes to run a CMA. If the houses you selected to compare have something else that your target home lacks, you’ll have to find out what it’s worth and subtract it from the price – if it’s the other way around, then add it to the value.
Secondly, you have to check the selling date. Although you might be able to select properties that have been sold within the last year, keep in mind that the nearer they are to the target property, the better. We’d recommend keeping it under three months.
Following all these aspects will result in reliable comparables that will lead to a reliable ARV. After all, and as Fabián Toledo pointed out here, the appraisal value is nothing more than an opinion. “The goal is to be as near as possible to the exact market value of the property. However, the price is just an opinion, and it varies from person to person. Although we’ll never know it for sure, there are ways to approach it based on information. The more data we have, the easier it’ll be to form our opinion”, he stated.
Where to find real estate comps?
Comparables are frequently used by real estate agents, realtors, home buyers and sellers, and appraisers. What they need is access to at least one multiple listing service that feeds all the necessary parameters to run comps. Though it’s not a hard job, assessing the ARV for one home can take around 20 or 30 minutes.
Yes, it’s not a significant amount of time if you only have to assess one property once in a while. But if that’s not the case, you might find yourself wasting maybe one or two days a week running comps. Due to the fact that it’s a repetitive task to look for properties with similar characteristics, it’s a perfect candidate for automatization. Having the right tool to automate comparables will save you valuable time – and we all know that in real estate, time is money!
Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.
Sources:
- https://www.investopedia.com/terms/c/comparables.asp
- https://www.rocketmortgage.com/learn/real-estate-comps
- https://www.biggerpockets.com/rei/real-estate-comps-house-value/
- https://www.thebalance.com/what-are-comparable-sales-1798357
