Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.
When you buy or sell a house, it’s important to have an idea of what the home is worth. As the buyer, that information can help you spot a good deal, make a fair offer, and avoid paying too much. If you’re the seller, it helps you set a realistic asking price -- one that will move the sale forward without leaving money on the table.
One way to determine a home’s value is to use comparable sales, or "comps," as they’re known in the real estate industry.
What are comps?
Comps are recently sold homes similar to the one you’re trying to buy or sell in location, size, style, and features. Appraisers, real estate agents, and others in the industry use comps to estimate a home’s value. That gives buyers and sellers a good starting point when it comes to making offers and setting asking prices.
You’ll get the best estimate of the home’s fair market value if the comps are very similar to the subject property. Depending on the location of the home, it can be easy or difficult to find valid comps. If you live in a planned development, for example, it will be easy, since there will be many similar homes within a block or two. Rural houses, on the other hand, can be difficult to compare, because there may not be any nearby homes. And if there are, they might not share any characteristics with the target home.
Each real estate market uses the comp parameters that make the most sense for that market. If you’re in a rural market, for example, you might have to cast a wider net or use older sales to find comps. Conversely, in a cookie-cutter neighborhood, you can narrow the search to homes on the same street that have sold within the past few weeks.
What are comps based on?
Different markets use different criteria for comps. But their main components include the following:
- Property type: Comps must be the same type of property as the target home. That means you can compare a single-family home only to other single-family homes or a duplex to other duplexes.
- Recent sales: Real estate markets heat up and cool off as the economy and interest rates change. That means fair market values can change quickly. The best comps are homes that are currently pending or have sold listings from the past three to six months (or less if it’s a hot market). Otherwise, you’ll be using out-of-date sales prices that don’t reflect the current market.
- Location: The closer, the better. Ideally, comps should be within a one-mile radius of the target home. In rural areas, where homes are farther apart, it’s normal to widen the search to, say, a five-mile radius. But there’s usually some natural boundary, such as a school district, that you should stay within.
- Size: People value their space. Comps should have roughly the same living square footage -- within about 10% of the home you’re trying to buy or sell. And the type of space matters. If most of the living space is above ground, it will be more valuable than if half of the space is a finished basement.
- When the home was built: Comps should be roughly the same age because major systems -- such as plumbing, electrical, roofs, and HVAC -- will likely be in similar condition. Of course, recent renovations can change that and those updates should be factored in. Ideally, comps should be within five years of the age of the home you’re trying to buy or sell.
- Condition of the home: Comps should be like the target home in terms of condition and finish levels. A fixer-upper, for example, shouldn’t be compared to a turnkey home, even if all other factors are the same.
- Style of home: It’s not relevant to compare a 1960s split-level ranch to a modern three-story row house -- even if they’re the same size. In addition to age, comps should be a similar style. That’s because changing real estate trends affect popular home styles -- and trendy houses fetch higher prices.
- Bedrooms and bathrooms: Comps should have the same number of bedrooms and bathrooms as the target home.
- Special features and other details: Curb appeal, luxury bathrooms, hardwood floors, stainless steel appliances, fireplaces, wine cellars, and great views all bump up a home’s value. Ideally, the comps will have features similar to those of the target home.
How to adjust values on comps
Comps will never be an exact match. Even cookie-cutter developments offer different finishes, floor plans, and upgrades that affect the values of the individual homes.
That’s where adjustments come in. Comp values are adjusted to show whether the homes are superior or inferior to the home you’re trying to buy or sell. Adjustments are always made to the comps and not the target home.
Adjustments can be made for:
- above-ground square footage,
- basement finish,
- bedrooms and bathrooms,
- style, and
- any other features.
Adjustments are inherently subjective. But an experienced real estate agent or appraiser will know how to account for differences between the target home and any comps. They'll adjust the price of the comps accordingly.
How to find comparable properties
Comps are a vital part of any real estate transaction. They help sellers set reasonable listing prices and help buyers make fair offers. You can explore your own comps by researching the recently sold homes in your area. You can find sales data online at real estate aggregator websites like Redfin (NASDAQ: RDFN), Zillow (NASDAQ: Z) (NASDAQ: ZG), and Trulia.
Alternatively, you can hire an appraiser or work with a real estate agent. These professionals know the market intimately and have the experience and instinct to run comps and make fair adjustments.
11% of the mega-wealthy swear by this investment…
The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.
If you, too, want to invest like the wealthiest in the world, we have a complete guide on what you need to take your first steps. Take the first step toward building real wealth by getting your free copy today. Simply click here to receive your free guide.