Thursday, May 3, 2012

What You Need To Know About Comps

If you've bought or sold property, you've certainly heard the term "comps." While most homebuyers and sellers know that "comps" is shorthand for "comparables," not everyone understands what comps really are or how real estate professionals use them.

What are comps?

The terms "comps," "comparables" and "comparable sales" refer to prices paid for recently sold homes that are comparable in size, style and location.
Comparable sales are a critical part of assessing the current market value of a property.
To determine the current market value of a property, agents and appraisers analyze recent comparable sales in the area. But simply choosing which sales to include, or even defining the area, can be subjects of debate.
Take, for example, the word "recent." That could mean 90 days or fewer. But according to others, "recent" can look back as far as six months, depending on the activity in the local market.
Whether a nearby property is in fact comparable raises more questions. Ideally, we'd like to find at least three properties with identical characteristics.
In a planned housing development or condo, finding identical homes is a possibility. But elsewhere, even houses on the same street can vary greatly. In those instances, look for properties with similar square footage and the same number of bedrooms and bathrooms. Choose homes where the square footage is not more than 10 percent higher or lower than that of unit being priced.
And as always with real estate, location matters. Proximity is a key component of comps but so is the neighborhood, and they aren't always the same thing.
Knowledge of the neighborhood and the school district are critical for determining comps. So while a comp might be close in terms of distance, it might not be appropriate if the two properties straddle opposite sides of a neighborhood dividing line.

Real estate agent versus appraisers

Real estate agents and appraisers often arrive at different comps.
Real estate agents will want sales that help to close their transaction. That's their job. Appraisers are an objective participant in the transaction and are being asked to provide an understanding for the lender of the true market value.
Having a stake in the game means agents are more likely to come up with a higher price. But they are also more likely to find value in a property's intangible qualities. That could mean considering recent upgrades, quality of workmanship and other factors likely to motivate buyers.
A real estate agent is much more likely to know if recent sellers were motivated to accept a lower price because of financial hardship or divorce. On the other hand, appraisers may drive through a neighborhood to verify a comparable sale, but they are not likely to have physically walked through those properties.
Regulations add to the gulf between comps generated by real estate agents and those generated by appraisers. New regulations are designed to keep lenders and mortgage brokers from influencing appraisers. But while appraiser independence is good in theory, appraisers often are hired to evaluate properties in places they're not familiar with.

What about foreclosures and short sales?

For the last few years, foreclosures and short sales have shaped the national real estate market. But distressed sales present problems when picking comps.
Traditionally, appraisers looked into the market and selected a sample from whatever sales had occurred in a neighborhood. That worked during a normal or stable market, (but) this market is different, because there are so many short sales and foreclosures.
Should these distressed sales influence prices for all sales in an area or only for other short sales and foreclosures? Your answer depends upon whether you're buying or selling.
It's definitely tricky. From the buyer's perspective, all sales, including bank-owned and short sales, should count to establish market value. However, standard sellers with equity should consider the lower, distressed sale comps. (But they) should also realize that prospective buyers may be willing to pay market, or above market, price for a standard sale.
Appraisers pay attention to the ratio of distressed to nondistressed sales.
If traditional sales make up the majority of the sales in a given neighborhood, then it is those sales that an appraiser will likely select. But if a neighborhood is dominated by foreclosure sales, then the appraiser will have to make a decision on which group of sales best represents the market.

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