Comparables, colloquially known as “Comps,” refer to properties that are similar to the subject property in various characteristics like location, size, condition, and features. These properties are used primarily in the Sales Comparison Approach to estimate the value of a home or real estate asset.
Detailed Definition
Comps are a crucial component in real estate valuation, especially when estimating the market value of residential properties. They provide a benchmark against which the subject property is assessed. The fundamental assumption is that properties with similar attributes will have similar market values.
Comps are selected based on several key criteria:
- Location: The comps should be in the same or a very similar neighborhood as the subject property.
- Size: The properties should have a comparable square footage.
- Condition: This includes the age of the property, the state of maintenance, and any upgrades or renovations.
- Lot Size: This pertains to the area of the land that the property occupies.
- Features: This may include the number of bedrooms, bathrooms, garage spaces, presence of a pool, etc.
Importance in the Sales Comparison Approach
The Sales Comparison Approach is a method used by appraisers and real estate professionals to determine the value of a property by comparing it to similar properties that have recently sold. This approach is grounded in the principle of substitution, which posits that a rational buyer will not pay more for a given property than the cost of acquiring an equally desirable substitute property.
Methodology
To implement this approach, the following steps are usually taken:
- Identification: Identify 3-5 comparable properties that have sold recently.
- Adjustments: Adjust the sales price of each comp for differences between it and the subject property. Adjustments can be made for location, physical characteristics, economic characteristics, use, market conditions, and non-realty components.
- Final Valuation: The adjusted prices of the comps are then averaged to derive an estimated value for the subject property.
Historical Context and Applicability
Origin
The concept of using comparables has long been part of real estate appraisal practices. The systemic approach using formal methodologies became more structured and widespread with the advent of organized real estate markets and modern valuation principles in the 20th century.
Modern Use
Today, comparables are widely used not just by appraisers but also by real estate agents, investors, and even homeowners interested in understanding market trends and property values. Data for comparables is often derived from Multiple Listing Services (MLS), real estate websites, and various databases that track property sales and listings.
Examples
Example 1: Residential Home Appraisal
Subject Property: A 3-bedroom, 2-bathroom home with 1,500 sq ft, located in a suburban neighborhood.
Comp 1: A 3-bedroom, 2-bathroom home with 1,520 sq ft, sold for $300,000. Comp 2: A 3-bedroom, 2-bathroom home with 1,480 sq ft, sold for $310,000. Comp 3: A 3-bedroom, 2-bathroom home with 1,510 sq ft, sold for $305,000.
Adjustments may be made for slight differences in square footage and other characteristics before arriving at an estimated value for the subject property.
Example 2: Commercial Property
Subject Property: A retail space of 2,000 sq ft.
Comp 1: Retail space of 2,100 sq ft, sold for $450,000. Comp 2: Retail space of 1,950 sq ft, sold for $430,000. Comp 3: Retail space of 2,020 sq ft, sold for $440,000.
Similarly, adjustments are made based on differences in size, location, and other relevant factors.
FAQ
How far back in time should I look for comparables?
Generally, comparables should be from sales that occurred within the past six months. However, in fast-moving markets, looking at sales within the last three months might be more appropriate.
Can rental properties be used as comps?
Yes, in some cases, rental properties can be used as comps, especially when valuing income-producing properties, though the primary focus is usually on sales.
Are there any online tools to find comps?
Yes, many real estate websites like Zillow, Redfin, and Realtor.com offer tools to find comparables based on specified criteria.
Summary
Comparables or comps are vital in determining the market value of real estate properties by using the Sales Comparison Approach. By evaluating properties similar to the subject in location, size, condition, and features, stakeholders can derive a more accurate and fair market value.
References:
- Appraisal Institute - appraisalinstitute.org
- Zillow - zillow.com
By understanding and effectively utilizing comparables, you are better equipped to make informed decisions in buying, selling, and investing in real estate.
