The Importance of Comparables

Comparables, or comps, refer to data on homes that have recently sold or are currently on the market that are similar to and in the same general area as the property of interest.  Often listing agents provide this information to their sellers in a formal report called a Comparative Market Analysis (CMA).

Whether you are buying or selling, access to good comparable property information provided by an experienced real estate agent is key to determining the market value of a home.  As a seller, comparables will provide the valuable information you need to price your home competitively in the market.  As a buyer, comps help you determine the value of a home and decide on a fair offer price.

Real estate agents gather the data they need for comparables from the Multiple Listing Service (MLS).  Here are the parameters that should be used and data that should be included in a good comparable analysis.

• Parameters for Comparables: Properties used for a comparable analysis should be within 10-15% of the square footage of the subject property and should have been listed or sold within the last 6 months.  They should have a similar number of bedrooms, bathrooms, and garage spaces as well as like sized yards and amenities.  The homes should be close to the same age and should have a similar overall condition.  If possible, the comparable properties should come from the same neighborhood or be within 1/2 mile to a mile of the home.  If it is a rural area, a large acreage property, or a very unique property, it is acceptable to extend your distance paramater to find comparable homes.

• Sold Listings:  Comparable homes that have sold within the past 6 months give the best picture of the current market.  Because these figures demonstrate what buyers in the market were recently willing to pay for a similar home, it gives you a very good indicator of what buyers currently in the market will be willing to pay.

• Price per Square Foot: Although not appropriate for evaluating all properties, price per square foot can be a very effective comparison tool.  If the comparable listings are indeed very similar in size, lot size, and amenities, the high, low, average, and median price per square foot figures for sold properties present an easily measurable figure by which to calculate an appropriate overall asking or offer price.  If you choose to use this figure, be aware that price per sqft rises as the size of a home decreases and decreases as size increases.  Thus, larger homes with more square footage have lower price per square foot figures than smaller homes.

• Active Listings:  Active listings don't always align with current market values, but they do represent the competition for sellers and the available options for buyers.  For this reason, active listings are worthy of consideration when taking a snapshot of the market.  You may consider touring these homes to more effectively evaluate how they compare to the subject property and then adjust your price or your offer accordingly.

• Days on Market (DOM):  The number of days a property has been on the market, or was on the market prior to being sold, can tell you a lot about price.  If a home sold within a month of being listed, you can generally determine that the price on the home was competitive.  Homes that have remained on the market for over 30 days were likely priced higher than they should have been.  Likely, these owners had several price drops before receiving an offer or waited it out long enough to find a buyer that was willing to pay the inflated price.

• Percentage Price Drop: One of the best figures for seeing the reality of the market is to see how much the price or a property dropped from the original list price to the actual sales price.  Appropriately priced homes will typically have a 0% decrease in the sales price from the asking price.  In fact, some well priced homes will have negative percentage figures, indicating that the sales price was actually more than the asking price (most likely due to a multiple offer sitution).  As you would expect, the percentage increase in price drop usually correlates closely with the number of days a home has been on the market.  The longer the home was on the market, the more significant the percentage price drop.  This is likely because the home was priced to high for the market and had to be dropped several times before a buyer was willing to make an offer.

While it is generally acceptable to negotiate price, a sellers chances of getting a full price offer on their home is more probable if they've used comparable information to price the home competitively.  Likewise, a buyers offer is more likely to be accepted if they have done their homework and presented an offer in line with comparable sales.

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