The myth of “Comps”…

One of the most overused, misused and abused terms in real estate is the term “Comps.” The term is generally defined as homes that have sold recently that are comparable (thus the term Comps) to the house being evaluated by the real estate practitioner. Comps are used on both sides of the deal. On the Sellers’ side they are used to help establish the rationale for a market price recommendation. On the Buyer side they are used to help establish or evaluate an offer price.

So, what is the myth part? The myth is found in the word itself and its definition.  Few Realtors® have the time, or take the time, to do the kind of exhaustive analysis of the homes that are chosen for comparisons sake. The Realtor may choose a few recent sales within a reasonable distance from the home being priced, based upon a quick look at some easily evaluated criteria – style, square footage, number of bedrooms and baths and maybe a few more. Most good Realtors do take some time to vet the list to make sure that homes with special value changing criteria, such as waterfront location, are removed.  Then the Realtor may run the remaining comparison homes through a CMA program of some sort to generate averages and statistics. Notice also that the Realtor did not usually visit each house on the list, so he/she really doesn’t know that they are comparable.

Appraisers, on the other hand, may spend hours agonizing over the details and accounting for differences with adjustments to the final value that they use for comparison in rendering their value opinions. Most appraisers also do drive-byes on the Comps, so that they get a feel for the neighborhoods involved and they usually take pictures of the comparable houses.. They may also take the time to look at all of the listing pictures of the Comps, so that they get a better feel for the interior amenities of the homes being used as Comps. Appraisers have to be able to defend each house that they choose to use as a comparable house and the relative values that they assign to it and to the subject house.

I stopped using the term Comps several years ago. I prefer to state to clients that what I am using for my analysis are “similar” homes – similar in size and style and amenities – at least as far as I can tell. I spend some time educating the seller or buyer on the fact that I have usually not been in the other homes, so I really can’t state that they are really comparable. What I can say with some high degree of comfort is that buyers looking for a home within the area of the subject house will likely also visit these houses or did visit them if we are looking at sold homes. I do stay within a reasonable search radius, where the term “reasonable” is relative to the density and sales activity of the area. In some cases a mile radius may suffice, but in some I may have to go out 5 miles. The same is true for the time span for sold homes. In high-density, high-activity areas, 90 days or even less may be all that I need to look at; however, out in the boonies I may have to look out over 6 months, even though the market may be changing in that time frame.

So, instead of Comps, I use a list of 5-8 “similar” homes, within a reasonable area and timeframe. I try to make sure that major factors like the style, square footage, number of bedroom and baths and a few other things are the same or close. Sometimes is it impossible to even get enough similar homes within the same style (ranches can be hard to find), so I try to make sure that the other criteria are very close.  I mainly use this list of similar sold homes for the averages that it allows me to generate. I then spend my time trying to evaluate whether the house that I’m evaluating is above or below that average and by how much. I do that based upon my own visit to the subject house. If it is a house that I might be listing, I do a Franklin Chart of the Pluses and Minuses of the house upon which I’m trying to establish a market value.  I am also usually able to create a to-do list for the homeowner of the things that he can do to improve the market value of the home. Some homeowner care about that and will take action, but many just say “it is what it is” and then I say “and because of that, here is the market value that I recommend and it is what it is, too.”

I usually take the time to educate a would-be seller on the four values that every home has – The assessed value (usually the lowest), the appraised value (higher but still conservative), the Realtor’s Market Value (sometimes called the CMA value and usually higher than the first two) and the insurance value (always the highest “value” for any house).  I try to get them to accept a Market Value for listing purposes that is not too far above what I believe might be the current appraised value. Being a little high is OK, if the market is moving up. On downward trending markets we have a heart-to-heart talk about letting go of “value” that is no longer there. Currently we still talk about when the market will recover all of the value that was lost in the Great Recession.

Many times homeowners have old appraisals, maybe from their last re-fi, and we have to discuss why those are no longer valid. We also have long discussions about why what was good enough for them for all of these years may not be good enough for the market and the potential  impact on market value of not having done any updates or upgrades for the entire time that they owned the home. I point out why Buyers will be discounting their offers on a home with a 25 year old roof, even though it doesn’t leak, yet or for a heating system put in when the house was built in the 1960’s, even if it still works fine for them.  On the buy-side we discuss why they can’t take all of the cost for every project that they see off the asking price. Some things just have to be accepted under the heading of normal maintenance needed.  

So, when getting Comparative Market Analyses on your home as you prepare to sell, take the term “Comps” with a grain of salt. The homes on any list that you are given are probably similar, but there can be major value-changing differences, even if all of the houses are in the same sub. There are choices that people make, while building or as homeowners, such as granite counters or Formica, hardwood floors or carpet, finished basement of unfinished,  crown molding or none, updated or original, new roof or original, new mechanicals or updated, all of which can have dramatic impact on the market price. Two houses with the exact same floor plan can have differences in all of those areas and have values that are tens of thousands of dollars apart. Are they Comps? You decide.

There is value in the work that your Realtor does to arrive at his/her market value recommendations, but don’t cling to the term Comps or get too upset if you happen to be in one of the homes that they used and it is nowhere near as nice as your home. They are just similar. But, do take note of the things that there that perhaps you could do in your home to improve its value. Take heart also that nothing will ever be comparable to the home that you made in your house. It’s just time to love it AND list it.