In real estate, “comp” is short for “comparable,” which refers to a property that is similar to another property in terms of location, size, features, and condition.
When someone is talking about a “comp” in real estate, they are typically referring to a recent sale or listing of a property that is similar to the property being considered for sale or appraisal. This can be used as a point of reference to help determine the fair market value of the subject property.
For example, if a real estate agent is helping a homeowner determine the asking price for their home, they might look for recent sales of similar homes in the same neighborhood to use as “comps”. The agent would compare the sales price of those similar homes to the condition and features of the subject property to help determine a fair asking price.
Similarly, an appraiser may use “comps” to determine the value of a property being appraised. When doing work for mortgage lenders, the “comps” can sometimes be called mortgage “comps”. They would look for recently sold properties that are similar in location, size, features, and condition to the subject property to determine a fair market value.
Using “comps” can be a helpful tool in determining the value of a property, but it’s important to ensure that the properties being compared are truly similar in all relevant aspects.
To determine comparable sales in real estate, real estate agents and appraisers typically follow these steps:
Define the property characteristics: Identify the key characteristics of the property being appraised, such as the location, size, number of bedrooms and bathrooms, age, and condition of the property.
Define the search area: Determine the geographic area to search for comparable properties, typically within a specific distance from the property being appraised.
Search the Multiple Listing Service (MLS): Look for recently sold properties within the defined search area in the MLS database. The MLS is a comprehensive database of real estate listings and sales, used by real estate professionals to find and compare properties.
Compare the properties: Once you have identified a list of recently sold properties that are similar in size, location, and other features, compare them to the property being appraised to determine how closely they match. Look at the sale price, the date of sale, and any unique features of the comparable properties that might affect their value.
Make adjustments: If there are differences between the comparable properties and the property being appraised, adjust the sale price of the comparable properties to account for those differences. For example, if the comparable property has extra square footage, adjust the sale price downward to account for the square footage in the property being appraised. Adjustments are always made to the comparable sales, never the subject property.
By following these steps, real estate agents and appraisers can determine comparable sales and arrive at a fair market value for the property being appraised.
Real estate “comps” can be used in several ways in the real estate industry.
These are the most common uses of real estate “comps”:
Determining market value: One of the most common uses of real estate “comps” is to determine the market value of a property. By analyzing recent sales of similar properties in the same area, real estate agents and appraisers can get an idea of what a property is worth in the current market.
Setting a list price: Real estate “comps” are also used to set a list price when a property is put on the market. By comparing the subject property to recently sold properties in the area, real estate agents can determine an appropriate list price that reflects the property’s value relative to the market.
Negotiating a sale price: Real estate “comps” can also be used to negotiate a sale price between the buyer and seller. Buyers may use “comps” to argue that a property is overpriced, while sellers may use “comps” to support their asking price.
Assessing property taxes: Real estate “comps” can also be used by local governments to assess property taxes. By looking at the sale price of similar properties in the area, assessors can determine the taxable value of a property.
Analyzing market trends: Real estate “comps” can be used to analyze market trends over time. By comparing sales of similar properties in the same area over a period of months or years, real estate professionals can identify trends in the market, such as rising or falling prices or changes in buyer preferences
The selection of comparables is a subjective process that requires professional judgment and experience.
The best comparables for appraisals are properties that are as similar as possible to the subject property being appraised in terms of location, size, age, condition, and other important features.
Location: The best comparables are located in the same neighborhood or within close proximity to the subject property being appraised. Properties in different neighborhoods or in a different part of town may not be appropriate comparables, as they may have different market conditions and characteristics.
Size: The best comparables are similar in size to the subject property in terms of square footage, number of bedrooms and bathrooms, and lot size. The closer the size of the comparable properties is to the subject property, the more accurate the appraisal will be.
Age: The best comparables are similar in age to the subject property. If the subject property is older, comparables that are also older may be more appropriate than newer properties, and vice versa.
Condition: The best comparables are in similar condition to the subject property. If the subject property is in excellent condition, comparables that are also in excellent condition may be more appropriate than properties in fair or poor condition.
Sale date: The best comparables have sold recently, ideally within the last three to six months. Properties that have sold a year or more ago may not be appropriate comparables, as market conditions may have changed since the sale.
Appraisers have different ways to verify the accuracy of comparable data.
Verifying comparable sales is a crucial part of the appraisal process, and it is essential for appraisers to ensure that the data they are using is accurate and reliable. Comparables are used to help determine the value of the subject property, and any inaccuracies or errors in the data can result in an incorrect appraisal.
Site Visits: Appraisers may conduct site visits to the comparable properties to verify their condition, size, and features. This may involve taking photographs, measuring rooms, and noting any features or amenities that are not visible in the listing data.
Public Records: Appraisers can access public records to verify data about comparable properties, such as the sales price, square footage, and number of bedrooms and bathrooms. They can also verify property tax information and zoning information.
Multiple Listing Service (MLS): Appraisers can use the MLS to verify data about comparable properties, such as the listing price, days on market, and features. They can also access photographs and other information about the properties.
Real Estate Websites: Appraisers may use real estate websites to verify data about comparable properties, but they must exercise caution and verify the accuracy of the data. This may involve contacting the listing agent or using other sources to verify the information.
Interviews: Appraisers may interview real estate agents or other industry professionals who are familiar with the area or the properties in question to gather information and verify data. This may involve asking for additional information about the comparable properties or verifying details about the subject property.
When appraisers use comparable sales to determine the value of a property, they are comparing the subject property to other similar properties that have recently sold in the same area. This allows them to establish a baseline value for the subject property, and make adjustments based on differences in size, features, location, and other factors.
If appraisers do not verify the accuracy of the comparable sales data, they may use incorrect information to determine the value of the subject property. This can result in an overvaluation or undervaluation of the property, which can have significant consequences for buyers, sellers, lenders, and other parties involved in the transaction.
For example, if an appraiser uses comparable sales that are not truly similar to the subject property, they may overvalue the property, which can result in the buyer paying more than the property is actually worth. On the other hand, if an appraiser uses comparables that are not truly similar, they may undervalue the property, which can result in the seller receiving less than the property is actually worth.
Therefore, it is important for appraisers to take the time to verify the accuracy of comparable sales data, and use only the most reliable and relevant information in the appraisal process.
The number of comparables that an appraiser uses can vary.
It can depend on the property being appraised, the purpose of the appraisal, and the standards or guidelines followed by the appraiser.
In general, appraisers will typically use a minimum of three comparable properties (also known as “comps”) when appraising a property. However, the appraiser may use more comparables if necessary to ensure that the appraisal is as accurate and reliable as possible. The appraiser may also consider other factors such as the location, condition, and unique features of the property when selecting comparables.
It’s worth noting that the use of comparable properties is just one of the methods that appraisers use to determine the value of a property. Other methods may include cost approach, income approach, and market analysis. The specific methods used by the appraiser will depend on the property and the purpose of the appraisal.
You can suggest potential comparables to your appraiser.
But the appraiser ultimately has the responsibility of selecting and analyzing comparable properties that are appropriate and relevant to the subject property being appraised.
It’s important to keep in mind that appraisers are required to follow certain professional standards and guidelines when selecting comparables. These standards may require the appraiser to consider factors such as the location, size, condition, and age of the properties, as well as their proximity to the subject property and the date of their sale. The appraiser may also need to make adjustments to the comparables to account for differences from the subject property.
If you have specific knowledge of comparable properties that you believe would be relevant and appropriate to the subject property, you can share that information with the appraiser. The appraiser may take that information into consideration when selecting comparables or in the analysis of the selected comparables.
Overall, it’s important to remember that the appraiser has the final responsibility for selecting and analyzing comparable properties in the appraisal report, and their selection should be based on their professional judgment and expertise.
