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Real Estate Lingo Deciphered: What’s a “Comp?”

Teddy Runge Teddy Runge, January 23, 2019 in

 

There are many things you can, and should DIY on your home. There are some things, however, that only a pro should tackle and that includes determining a home’s current market value.

In fact, a National Association of Realtors’ survey of for-sale-by-owners found that determining an accurate price for their home was the homeowner’s most challenging task. Real estate agents and professional appraisers pretty much use the same process to determine a home’s market value. The purpose behind the two, however, is what differs, albeit slightly.

Agents are determining market value whereas the appraiser’s sole purpose is to ensure that the lender isn’t loaning more than the home is worth. Both will compare your home to others. These other homes are known as “comps,” short for “comparable.” Let’s take a deeper dive into how a particular home qualifies as a comp for your home.

What is “Market Value?”

Simply stated, market value is, “The highest estimated price that a buyer would pay and a seller would accept for an item in an open and competitive market.” Well, doesn’t that sound simple. But how do we know what a buyer will pay?

Sold homes, then, are the comps agents use when preparing a comparative market analysis. Appraisers, too, use sold homes when working on figuring out how much a home is worth.

Typically, we’ll look back no more than six months for sold homes, similar in age, style and size, within a one-mile radius of yours. Yes, there are times we need to look further back in history or extend the radius, but not often.

Location, Location, Location

Location is an important factor when searching for comps. So important, in fact, that some lenders require that their appraisers search no further than one-mile in all directions if the subject home is in the suburbs and five miles in rural locations.

We, as real estate agents, have a bit more flexibility. We typically start our search for comps close to the subject property and work our way out until we have at least three comps that have sold in the past six months or so.

Then, there are additional “location, location, location” aspects to compare. A home’s location can positively or negatively impact it’s value.

Positive nearby amenities include:

  • Parks
  • Schools
  • Shopping
  • Access to seasonal activities like skiing or boating
  • Access to freeways and highways

There are additional proximity amenities, some of which are specific to certain regions, such as proximity to the beach or golf course.

Negative influences include:

  • Neighborhood condition (if the neighborhood is rundown)
  • Neighbors (hoarders, sexual predators and homeowners in foreclosure)
  • Traffic, train, airport or other noise
  • Schools (homes in poor-performing school districts are worth less than those in high-performing districts)
  • Oversupply of homes for sale
  • Crime

These are just a few of the ways the location of your home impacts its value.

Comparing the Condition of the Home

With both the real estate agent and the appraiser, the condition of your home will carry a lot of weight when viewing the comps.

First, we’ll determine if there are any deferred maintenance issues, such as leaky plumbing, overgrown or neglected landscaping, damaged flooring, cracked tiles or window glass, among others.

Then, we’ll deduct value if comparable homes are in better condition or add value if they aren’t.

Determining how much a home will sell for in the current real estate market depends on how much buyers are willing to pay for similar homes. Those homes, as you now know, are called “comps.”