A “Comp,” short for Comparable Property, is a real estate term referring to properties with similar characteristics to a subject property under consideration. Comps are used extensively to determine a fair market price for real estate transactions, whether buying, selling, or assessing property value for other purposes.
Importance of Comps in Real Estate
In real estate, accurately pricing a property is crucial for a variety of reasons:
- Market Valuation: Comps help real estate agents and appraisers estimate the current market value of a property.
- Pricing Strategy: Sellers rely on comps to set a competitive yet attractive asking price.
- Negotiation Tool: Buyers use comps to justify offers lower than the asking price or to challenge appraisal evaluations.
- Lending Decisions: Lenders use comps to assess the risk associated with lending based on the property’s market value.
How Are Comps Selected?
Proximity
To be a reliable comp, a property should be in close geographical proximity to the subject property—ideally within the same neighborhood or a similar area.
Size
Comps should be of a comparable size, including both land and building square footage. Properties should also have a similar number of bedrooms and bathrooms.
Condition and Age
The age and condition of structures, such as the year built and recent renovations, are considered. Similar structural conditions ensure more accurate comparisons.
Market Timing
The sale date of comparable properties should be recent, typically within the past six months, to reflect current market conditions.
Types of Comparable Properties
Active Listings
These are properties currently on the market. Although useful, they reflect asking prices rather than closed sales prices.
Pending Listings
Properties that are under contract but have not yet closed can provide insight into what current market buyers are willing to pay.
Sold Listings
Closed sales are the most reliable comparables since they reflect actual market transactions.
Expired Listings
These are properties that were listed but did not sell. They help in understanding the upper limits of what buyers are unwilling to pay.
Example of Using Comps
Consider a homeowner wishing to sell a three-bedroom house. Here’s how they might use comps:
- They look for recently sold three-bedroom houses in the same neighborhood.
- They analyze the sale prices of homes similar in size, age, and condition to set a competitive but fair asking price.
- Adjustments might be made for particular features such as a finished basement or a swimming pool.
Historical Context
The concept of using comparable properties can be traced back to traditional property appraisal methods. The modern practice of using systematic data from Multiple Listing Services (MLS) began in the 20th century, revolutionizing the accuracy with which properties could be valuated.
Applicability Across Real Estate Transactions
From residential homes to commercial properties, the use of comps is universal. Both buyers and sellers use comps to inform their pricing and negotiation strategies, playing a fundamental role in the real estate market dynamics.
Related Terms
- Appraisal: A professional assessment of a property’s value, often employing comps along with other evaluation methods.
- Market Analysis: A comprehensive examination of the real estate market, including trends and comparable properties, to determine market conditions and values.
- Fair Market Value: The price a property would sell for on the open market, as determined by a willing buyer and seller, often using comparables.
FAQs
How far back should comps be considered?
Can comps be used for rental properties?
What if there are no good comps available?
References
- National Association of Realtors. (2023). Guide to Using Comparable Property Sales
- Appraisal Institute. (2022). The Appraisal of Real Estate, 15th Edition
- Federal Housing Finance Agency. (2024). Real Estate Sales Data Overview
Summary
Comps, or comparable properties, play a critical role in the real estate industry by helping to accurately price properties. They assist buyers, sellers, appraisers, and lenders in making informed decisions by providing a benchmark for current market values. Understanding and effectively using comps can lead to more successful and fair real estate transactions.
