What You Need to Know About Comps and How They Affect Your Home’s Value
Comps. They’re the one thing that can cause a seller some tense moments as they work with their real estate agent to come up with a price for their home. ‘Comps’ is actually the shortened version of comparisons. Basically, they’re the prices of homes sold in your area in the past 3-6 months. While the concept of a comp is pretty easy to understand, that doesn’t mean that comps are without nuances.
There are several things you need to keep in mind as you use comps to set the price for your home or, in the case of a buyer, use comps to determine whether a home’s price is fair.
Comps, CMAs, and Why They’re Important
A CMA is a comparative market analysis and is the industry term for comps; a report that lists the sale price of similar homes in your area.
“These reports estimate a property’s value based on properties of similar size, quality, and condition that typically sold within the past three to six months,” said Shawn Kunkler, an agent with Paragon Real Estate Group in San Francisco. “These reports are valuable because they help you understand the current housing market and trends.”
Comps are great when home prices are on the rise or when investors come into your neighborhood and renovate homes, therefore increasing their value. However, they can work against you when the market is starting to tank and banks foreclose on homes in your area or sellers do short sales.
The CMA your agent provides you is the first step to getting a good estimate of the value of your home, but they aren’t the final word; your appraisal is the key.
“The difference between an appraisal and a CMA is that an appraisal is completed by a licensed real estate appraiser while a CMA is created by an agent and is usually less formal.”
Establishing True Value May Not Work With Just Your Neighborhood
If you’re selling your home a few months after a random foreclosure or two show up in your neighborhood, there’s a good chance that limiting your CMA search to your neighborhood may not work because the results could be skewed outside the norm.
In these instances, your agent may have to expand comps to neighborhoods similar to yours but not exactly close to your home.
“Markets are constantly changing, so it is important to work with timely information. Honing in on recent pending or, in particular, sold comps is arguably best practice,” says Lance Marrs of Portland’s Living Room Realty.
Comps Aren’t Always Going to Convince the Buyer
Buyers are a tricky lot. When it comes to comps, there’s a good chance they may not care as much about what similar homes are selling for as they are about how much money they can spend. That’s why it’s important that you try to be realistic about your listing when you’re comparing your home to comps.
“You cannot just look at properties nearby that have recently sold and feel you have a good understanding about the market in which you’re selling the home,” says Jacque Fairbourn, a PR rep with flipping site DoHardMoney.
“Remember, buyers are looking to pay as little as possible for the home they want and will not be looking at the comps through the same lens as you.”
A good selling agent can work with you to figure out how to handle the sale you want to get from your home, the market around your home, and the price that buyers are willing to pay.
Comps Are an Entirely Different Thing When the Market is Hot
When the market is cool and buyers have the advantage, you may find yourself in a position where neighborhood comps can’t carry your home’s price; buyers will underbid to no end because they know the market is working in their favor.
However, the opposite is true. When the market is hot, comp prices may not be able to catch up with demand. In other words, what comparable homes were selling for three to six months before yours goes on the market may not account for increased buyer demand.
“One of the things that I try to clarify for buyers early on is that listing price is just a number – especially in hyper-competitive markets like Boston currently, a property is worth what someone is willing to pay for it,” says Kate Ziegler, a Realtor at Boston’s Arborview Realty.
She also notes that, if your house is somewhat of a neighborhood unicorn because it’s bigger, newer, or just better than other recently sold homes, you may find yourself wanting to raise the price, especially if recent listings sold at prices that resulted from bidding wars.
“To get a sense of this type of demand, ask your agent to calculate the average percentage over (or under) asking similar properties have closed recently,” she said. “Be wary of going too far above what the comps bear out, lest you face an issue with appraisal.”