Comps

How do you decide how to price a home?

Today’s blog entry is all about comps. Really, it’s a conversation about pricing, too. Whenever you want to price a home, you need to know what the comps are.

What makes a home a comp?

Comp is simply shorthand for comparable.

What makes a home a comp? Like everything else in real estate, it starts with location. That’s the golden term, isn’t it?

The more obvious reason to start with location is that it has such a large impact on the lives of the people who live in the neighborhood. Starting at a national perspective and how climates differ from one region to another, down to the local level where proximity to major thoroughfares and school zones are considered, we all understand that the location of a home plays an integral part in how valuable it is.

The closer two homes are in proximity, the greater likelihood that they are also similar in lot size, square footage, floor plan, materials used, and all the other things that contribute to a home’s total value.

Size

And it looks like I might have tipped my hand on the next few things that make a home comparable.

After location, you want to consider a property’s size. This applies not only to the size of the lot, but also to the square footage and number of bedrooms and bathrooms. Because of lot size, and the builder’s desire to offer housing solutions for families of varying sizes, a subdivision is likely to feature homes of different sizes.

Just because a home is located within your cove does not make it a comp.

If you are a 5-bedroom home with 3,800 square feet and your next door neighbor is 2,000 square feet with 3 bedrooms, the two likely won’t provide good sales data for one another, despite the virtually identical location.

Recency

Lastly, it’s important to consider recency.

I tipped my hand once again by mentioning sales data. Since home values are often expressed in terms of price per square foot, you’ll need the sales data from one home in order to make decisions about the other. After all, a home has to sell in order for the price to mean anything.

Since the real estate market changes from year-to-year and season-to-season, it’s important that the sales data is recent enough to be relevant. Local economics, mortgage interest rates, and the number of homes for sale can vary so much that the refi appraisal you had done last year likely won’t cut it when you need to determine your home’s current value.

How many is enough?

Now the question becomes how recent is recent enough, and how far away is too far. The answer to those questions depends on how unique a property is.

For example, imagine a 3-bedroom, 2.5-bath home in a neighborhood of 1000 homes. How far might your location need to vary, and how far in the past might you need to look in order to find enough comparable homes that have sold? Probably not very far either way, right? I would guess you could look at the past 90 days and no further than 1 mile away to get enough sales to start recognizing some trends.

Now imagine a 15-acre lot with a 6,500 square foot home and 10-stall barn on the property. Wouldn’t you agree that it might take more than 90 days and a 1-mile area to find comparable sales?

What you need is about 6-10 sold properties, weighing the recency and proximity, in order to start drawing conclusions on pricing.

Take the sales price of each property, and divide it by that home’s appraiser-measured square footage, which is often expressed as sold sqft. Sold sqft refers to the heated and cooled square footage - not the “under roof” square footage. Attic space, unfinished basements and garages won’t help you determine livable square footage. This figure will give you the price per square foot for each individual home. Add up all the figures and divide by the total number of sales. This will give you the average price per square foot, or avg. $/sqft.

Once you know the avg. $/sqft, you can multiply your home’s square footage by that number in order to get a likely sales price for your home.

This is the absolute best place to start.

You will know from the 6-10 sales what is the high and low end of what homes might sell for in that area, and that can act as a guide for your home, but things typically trend more towards the average once you consider everything that goes into a home’s value.

Your home may have a more updated kitchen than Sale A, but they replaced their roof one year before the sale and yours is 22 years old. You might have the same exact square footage and number of bedrooms as Sale B, and they may be in very similar conditions in terms of updates, but the second downstairs bedroom makes your floor plan more desirable than Sale B. Sale C could have that second downstairs bedroom and a 22 year-old roof, but if they’re located in a cove and your lot backs up to a major highway, there has to be an adjustment for that.

All these things have to be recognized, weighted by prevailing market demands, and accounted for in the determination of your home’s likely sales price.

Adjust for the Market

There must also be an adjustment for the current market conditions.

The sales data will help you determine a working number and give you an indication of what’s possible in a given neighborhood, as well as where you might fall versus average, but there’s nothing that says you can’t set the market. You determine that possibility by looking at the active inventory.

This is your competition, or your comp comps. That’s a joke… no one says comp comps.

Anyway, when you look at sales data and see that there is a real demand for an updated, 4-bedroom home with a swimming pool, and then look at active listings to find that there are no homes currently listed for sale with a pool and only one 4-bedroom home listed at all, you can set the market. You can become the new highest sales price per square foot because of the most basic economic principle - supply and demand.

Putting it all together

Putting it all together, it’s step one: start with location. That will ensure some semblance of consistency. Step two: look at sales data, focusing on average and adjusting from there. In step three, you’ll use the working number to see how your home compares to the active competition.

Homes are like snowflakes - easily offended by the slightest… I’m kidding again. Homes are like snowflakes in that no two are exactly the same. However, if a home is similar enough to another, you can safely assume that an individual in a similar enough situation to another would be willing to pay the same amount (or at least similar).

And that is the essence of what makes a home a comp - would the person looking at one home (or the person who purchased a recent sale) also be interested in your home? If the answer is yes, you’ve probably found yourself a comp.

It takes an expert to determine what weight is applied to the differences between the comps, and that’s where a good real estate agent earns their reputation. We have a great one. Let us help you.