I had a small appraisal business I ran out of my home for many years. This meant understanding property values came easy for me as I transferred my career into full time investing. Appraisers use several methods to establish value on a form called a Uniform Residential Appraisal Report (URAR) which includes the Sales Comparison Approach, the Income Approach and the Cost Approach. For residential properties, the Sales Comparison Approach is commonly given the most weight and the comparables are placed on a grid and appraisers make their plus or minus adjustments for improvements or deficiencies.
If you are looking to buy or sell a home you will need to understand how comparables or “comps” are used to determine value. This is the best way to understand not only value, but also how the market reacts to a particular style, its location and condition. Factors included in pulling comps from the market place include time, location, square foot, age, style, bedroom count and more.
Here are a few tips for choosing the best comps:
Select recent sales
Recently sold homes will reflect today’s market; ideally you will want to use sold homes that have transferred within the last six months. The more recent the comps the better, but that doesn’t mean you can’t use an older comparable, say one that is seven or eight months old. Just remember, you want to use the most recent sales to determine the value today.
Use comparable sales that are in the same community. The closer the comps are to the subject property the better. Near by sale transfers are a good reflection on buyer’s reaction to the immediate area. If the subject property is located in an urban location, you may be able to pull comps within a 12 block radius of the subject property. However, if the properties location is in a rural location, you may have to go miles for a comparable. A good rule of thumb is to stay within a half mile radius of the subject property.
Pay close attention to favorable views or locations reflecting conveniences such as shopping or drive time to employment centers. Perhaps a sought after development or builder may have a positive reflection on value. If the property backs up to a rail road track you should have at least one comparable that has sold within the past six months of similar size, age and style as one of your comparables. This sale will reflect market reaction, if any, for buyers purchasing property, that may have a negative influence on value due to its location.
Choose homes that are as similar to the subject property as possible such as style, age, square footage, number of bedrooms and bathrooms, total room count, amenities, lot size, etc. For instance, if the subject property is a ranch-style home, you would ideally choose other ranch-style homes that are similar in age and size. One-bedroom homes to one-bedroom homes, condos to condos all must be of similar age and square foot. The more similarities you can find in the comparables, the better you will estimate the value of the subject property. The more comps you use the easier it will be to estimate value.
Square foot on the first and second floor is normally considered finished living area and this area is measured from the exterior of the home. Any unheated area of the home such as enclosed porches or garages are not considered finished living area. Your comps must be of similar square foot as to the subject property. I suggest you go 10 percent plus and minus the subject property. For example, if the subject property is 2000 square, you will pull a range from 1800 to 2200 square feet. Remember these are just guidelines and there is always a little wiggle room.
Use properties of similar age as the subject property. Pull your comparable range from 10 years plus and minus the subject property. Properties built in the early 20th century have a different floor plan than properties built to today’s standards. It was common that properties built in 1900 typically have one bath but the builders today typically build homes with two and a half baths. New construction must be compared to new construction and I would tighten up my range for a home that is only a couple years old and only allow my range to be five years plus or minus.
Now that you have your comparable in front of you, take time to drive by each one so you can physically see if they truly compare to the subject property. Pay attention to quality of construction, condition, location, nearby amenities and so on.
Use the tools in front of you
REI Black Book (REIBB) will pull comparables within the same area of the subject property but you will have to sort through and pick comps of similar style, size and age. You can also use the map feature to see if the property looks similar to the subject property. If you do not have REIBB you can also use Realtor.com, Zillow.com and Trulia.com to pull your comparables.
A true comparable will be a reflection of the subject property as to time, location, style, size, age, and quality of construction and they all must be closed transactions.
I hope that this blog allows you to better understand how to use and find comps when you are looking at a potential deal.