What are Real Estate Comps?

If you’re in the process of buying your first home, you may be confused as to how a real estate agent or seller arrives at a home’s sale price.

One common method used to determine the appropriate sale price or valuation of a home is called the sales comparison approach (SCA). To determine the market value of a home using this method, you’ll need to collect what are called, “real estate comps.”

In this post, we’ll cover what real estate comps are, how they work, why they’re useful for both buyers and sellers, and common mistakes to avoid when collecting them to create a comparative market analysis. Let’s get started.

What are Real Estate Comps?

Real estate comps are homes that have recently sold that are also similar to the subject property in terms of:

• Location
• Size
• Number of bedrooms and bathrooms
• Age and condition
• Attractive or unique features

Home sellers, sellers’ agents, and appraisers all use real estate comps to determine the market value and sales price of a subject property. If you plan to obtain a home mortgage to purchase a home, then you will want to pay particular attention to similar properties in the area where the home you want to buy is located. That’s because most lenders will require homebuyers to get a third-party appraisal to help determine the home value for the property they’re trying to buy. The lender will then approve a mortgage loan amount based on that valuation.

Since real estate comps will play a role in the mortgage size a homebuyer can qualify for, it may be helpful for homebuyers to collect real estate comps before putting in an offer, so they get an idea as to whether the home is appropriately priced.

How Real Estate Comps Work

Not every home sale will be considered a “comp” for the home you’re looking to buy. In order for a home sale to give you relevant information on how much you should pay for a particular property, the home that was sold should be similar to the one you’re looking to buy.

Here are five factors you may want to consider when assessing whether a recent home sale is a relevant comp for the subject home:

1. Location

Ideally, you want to look for homes that were recently sold in the same neighborhood as the home you’re looking to buy. This is because each neighborhood has distinct market features that affect the way its homes are priced. In urban or suburban markets, appraisers will consider comps within a mile, whereas in rural markets, comps could be from up to 10 miles away from the subject property.

2. Size

Both the size of the home you are looking to buy and its lot size should be similar to those of comparable homes. They don’t have to be the exact same size, as you will calculate the price per square foot for each comp, but they should be relatively close.

3. Number of bedrooms and bathrooms

A three-bedroom home will be priced differently than a home with two or four bedrooms, even with similar square footage.

4. Age and condition

An older home will often be priced differently than one that was recently built. The same goes for a home that has been well-maintained or even undergone certain renovations versus a similar home that has been allowed to fall into disrepair.

5. Attractive and unique features

There are certain features homeowners can add to their spaces to make them more valuable to buyers, like a pool or a new deck.

Using Real Estate Comps to Value a Property

In order to get the most accurate market value, you will want to collect no fewer than three relevant real estate comps that are as recent as possible, but no older than a year. That’s because the real estate market moves quickly, and factors affecting a home sale a year ago (e.g. the job market or interest rates) may not be the same today.

Once you’ve collected enough comps, you’ll want to analyze the comparable properties, adjust their sale prices based on how their attributes compare to the home you’re looking to buy, and calculate the average price per square foot.

You may not find any recent sales that are exactly like the home you’re looking to buy, and that’s ok. You can gather the data on the most relevant recent home sales and adjust the sale prices based on how their stats compare to the subject. You can then use these adjusted sales prices to calculate an estimated market value of the home.

How to analyze the comparable properties

Once you’ve selected your market comps, you will want to collect as much accurate data on these properties as possible. This will help you determine how similar the recently sold home was to the home you’re looking to buy and what adjustments you need to make to that sale price to make it truly comparable.

It can be helpful to create a spreadsheet with the addresses of the sold properties and the one you’re looking to buy in one column and their sale prices, list prices, and attributes in subsequent columns. This can make it easy to analyze and compare attributes of the different homes. Take note of which attributes are similar to the home you’re looking to buy and which are different. You’ll want to make adjustments to the comparable property’s sale price to account for the differences and current market conditions (see more about this below).

How and when to adjust a comparable property’s sale price

If a real estate comp has features that are different from the home you’re looking to buy, you will want to adjust the comp’s sale price up or down, depending on whether or not they would make that home more or less desirable. For example, if a real estate comp is newer than the home you’re looking to purchase, you can adjust that sale price down a little bit to reflect what it may have sold for had it been the same age.

Once you’ve adjusted all of your comp sales prices, it’s time to estimate the market value of the home you’re looking to buy.

How to use the adjusted real estate comps to estimate market value

To use the real estate comps to estimate the market value of the home you’re looking to purchase, you will want to calculate the adjusted price per square foot for each home. To do this, take the adjusted sales price and divide it by the square footage of the home.

Once you have all of your comparable properties’ prices per square foot, you’ll want to calculate their average price per square foot. You can do that by adding up all of the prices per square foot and dividing that number by the number of comps you have. Then multiply the average market price per square foot by the square footage of the home you’re looking to buy, and you’ll arrive at an estimated market value for the home.

The Benefits of Using Real Estate Comps in the Buying Process

Real estate comps provide accurate, current data on the real estate market because these are sales that have actually closed. They give you the power of information so you can make informed decisions about buying a home. Comps can also give you an idea about the value of a property and whether the asking price is reasonable, competitive, or overpriced. They can also help you negotiate the sales price, contingencies, and other closing costs because they give you real data you can show the sellers.

How to Find Reliable Real Estate Comps

The best way to find reliable real estate comps is to ask your real estate agent. They have access to the multiple listing service (MLS), the online tool that real estate agents use to list their properties for sale. Your buyer’s agent likely searches the MLS to find properties for sale that they think you’ll like. Your agent may also know of homes that were recently sold off-market or directly from the seller to the buyer without the use of an agent.

Additional ways you can find real estate comps are by looking at real estate websites like Redfin, Zillow, and Realtor.com. Just be aware that these sites may not have the most updated information reflected on them.

Once you’ve collected your comps, you’ll want to drive by the properties (if you can) to verify the information reflected in the listings.

Common Mistakes to Avoid When Using Real Estate Comps

There are three common mistakes people make when collecting real estate comps.

1. Using comps that are too old

Any home sale that’s older than a year is unlikely to have experienced the same market forces that are influencing the real estate market today.

2. Not adjusting for unique features

If you don’t adjust the sales price for special features that are unique to the comp property, you may not get an accurate estimate of the appropriate price per square foot to use when valuing the home.

3. Collecting too few comparable properties

In order to get an accurate assessment of the real estate market, you need enough data points. That way, it’s easier to spot a home sale that is an outlier (much higher or lower than the average). You don’t want your valuation skewed by a one-off sale.

Conclusion

Collecting accurate real estate comps is an important part of the home-buying process. They give you an idea of how homes are being valued in the current real estate market and how much you can expect to pay for a home you’re looking to buy. They can also give you powerful data points to support your negotiations.