5 Tips to Choosing the Best Comparables

If you are in the market to sell, or perhaps buy a home, you will soon come face-to-face with comparables, or “comps” as they are known. Comps are regarded as the single-best tool in determining a home’s value since they compare criteria from similar, recently sold properties in a neighborhood, such as sale price, age of house, size, and square footage. Real estate professionals use comps to prepare a Comparative Market Analysis (CMA) for their clients and comparables are also used in formulating Zillow’s Zestimate® home value.

Here are 5 tips for choosing the best comps for your home:

1. Location, location, location

Select comps as close to your address as possible. Ideally, you want comps within a half-mile radius, but there are some exceptions to this rule. For example, a comp within a block or two of yours might not be a good comp because it sits higher on the hill and has phenomenal views, or it’s closer to a main arterial or freeway. Likewise, a house similar to yours could be a mile away, but still is part of the same market area since neighborhoods are not always carved out in neat, rectangular-shaped boundaries. This is a good comp, even though it’s farther away.

Also, homes in developments should be compared against comps from the same development since these homes were all built together at a specific time, by the same builder/developer.

2. Apples to apples

Choose homes that are as similar to yours as possible in terms of style, construction, age, square footage, number of bedrooms and bathrooms, total room count, amenities, lot size, etc. For example, if you live in a ranch-style home, you would ideally choose other ranch-style homes that are similar in age and size. Likewise, if you live in a one-bedroom condo, you need to choose condos of similar age and size — not single-family homes. The more similarities you can find between two homes, the better the comp. Choose anywhere from 3 to 5 comps to gain a good understanding of your home’s value.

3. Select recent sales

Ideally, the most recently sold homes will have the strongest bearing on what your home will bring, but in slower markets, you might not have that luxury. Rule of thumb: Getting recently sold homes from the previous 3-4 months is ideal, but if not, then look back 6-8 months. In some cases, transactions that occurred two years ago are still considered comparable depending on the market and uniqueness of your home. Some appraisers and real estate professionals will even consider homes that are under contract and free of home inspection snafus as part of their comparable selection process.

4. Price per square foot

Price per square foot is a time-honored method of real estate valuation. However, it doesn’t account for a choice location, a move-in-ready home or personal criteria. You should also factor in how the property was measured and whether the square footage includes the garage or other detached buildings on the property.

5. Fuzzy stuff

You have your data, you’ve compared the numbers, but here come the individual characteristics. These things are more difficult to quantify, but could boost or detract from a home’s value. In order to be comparing apples to apples, you need to consider these “soft” features when pulling together your comp list. For example, consider:

  • Curb appeal — The house sits on the “nice” side of the street; it’s neatly landscaped and has sidewalks
  • Condition of exterior — Visually make notes of the condition of the roof, paint, chimney, driveway, fences, etc.
  • Nearby amenities — Walking distance to cafes, shops and restaurants
  • Neighborhood — Is the house well-kept but all others around it falling apart?
  • Traffic/noise — Is it located on a busy street or near a noisy freeway?
  • Schools — Is it in a good school district? Whether you have kids or not, owning a home in a top school district adds tremendous value to a home.

How appraisers do it

While the above process is for the home seller or buyer, you probably wonder how appraisers select comps. Mortgages Unzipped author Ken Cook, who is a lender in the Atlanta area, sheds some light on how appraisers go about selecting comps.

Appraisers use various methods to establish value including the “Sales Comparison Approach,” the “Cost Approach” and the “Income Approach.” In the Sales Comparison Approach (which is the only appraiser approach we will discuss in this post), the appraiser will look for values like we did in tips 1-5, but they will make plus or minus (+ and – ) value adjustments for improvements, age and other factors on the “grid” (screenshot below) of the Uniform Residential Appraisal Report (URAR).

The URAR is Fannie Mae’s form 1004 for single-family homes and form 1007 for condominiums. It is a standardized report which loan officers and underwriters are trained to read and comprehend because the home valuation determined by the appraiser is crucial to the loan-to-value (ratio) of the mortgage. Once completed, appraisers will supply the URAR to the client’s lender.

Summary

Choosing your own comps is a good exercise for you if you are selling. Not only will it help determine your home’s selling price, but it will give you great insight about your immediate market and other homes that could present some competition. After all, real estate is local and you need to know what you’re up against. But if you’re still unsure, go that extra step and get a CMA from a real estate agent and if you’re still not convinced, hire an appraiser. It will cost you, but peace of mind can mean everything.