Comparative Advantage

By Kristen Castillo

June 7, 2016 5 min read

Buying or selling a house relies on comparable sales, known as "comps." The premise is simple: How does the "subject house" that's being bought or sold compare to similar properties in the area?

Real estate agent Regina Sitterley of Sell Mom's House flips properties -- buying, fixing and reselling homes -- for a living. She runs comps every day and knows what matters.

"Determining what a house could sell for and what finishes it will need is a vital part of my decision to buy a house," she says. "Comps dictate how I make an offer, set the budget for renovation and affect my negotiations when selling."

She looks for comps of properties within the same subdivision or neighborhood that have been sold within the past 180 days, as well as similar square footage, give or take 10 percent, and similar style. "I wouldn't compare a brick ranch with a contemporary," says Sitterley.

A big consideration is whether or not the home has been upgraded. That helps her determine what updates need to be made to get a comparable sale price when she relists the home.

"If a house will sell for $200,000 with laminate floors then I don't need to put in hardwoods to get the same price for my house," says Sitterley.

*Determining Comps

Comps tell a story of what's been happening in the neighborhood.

"Looking at comps is a fine art," says real estate agent Jim Esposito, explaining when reviewing comps you need to factor in variables including the number of bedrooms and bathrooms and the condition of the property. "It is often quite difficult to find a very good comp."

The comps are based on purchase prices for properties with similar characteristic, including details like granite countertops, a fireplace and hardwood floors.

The comp property is typically within close proximity to the subject home. "It is within a one mile radius and sold within three to six months," says real estate agent Tracey Hampson, noting that timeline is fairly standard.

"If you go back any further you are going into a different market," she says. "A home listed in Christmas is going to be priced differently than a home listed in the busy months of spring and summer."

If there's no sufficient comp because the subject property is different in many ways from existing sales, agents have ways to come up with a comp.

"One approach is to break the most recent sales down into a per-square-foot price, then average them out," says Esposito.

*Pros and Cons

Depending on the ups and downs of the real estate market, buyers or sellers can benefit from comps under different conditions.

The seller of a home being placed for sale based on great comps will be thrilled to set a high asking price. But comps from a changing market can often put a damper on pricing.

"The downside of comps are when a home owner lists their home low for a quick sale, which lowers the value of your home," says Hampson, explaining homes that are short sales or bank-owned also can drag down house sale prices. "They are almost always listed lower because of the work that is needed, but they still affect the pricing of your home."

Another pricing problem? During a bidding war, a buyer who offers way above list price often can't get a home appraisal to substantiate that price.

"You then go back to the negotiation table and hope they meet each other halfway, meaning the buyer comes in with additional funds and the seller lowers their price," says Hampson.

*Closing the Deal

No matter what the comp is, it's often just a starting point for buyers and sellers.

"Sellers will always expect to get that price or more, while buyers are looking for a bargain and will try to get the property for less than 'fair market,'" says Esposito.

Still other buyers are driven by more than price. "Ultimately a home is worth whatever a buyer is willing to pay," says Hampson. "Comps or no comps!"

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