Real estate is an industry that may use terms and phrases that may be unfamiliar to those who are not experts in the field. However, understanding some of these terms can be beneficial for anyone looking to buy, sell, or rent a property. One such term is "comp" or “comparable.”
Ok, but what is a “comp”?
A "comp" is a property that is similar to the one being considered for purchase or sale. These properties are typically currently on the market, under contract, or have been recently sold. They are used as a reference point to determine the approximate value of a property in the current market. Understanding comparable properties can aid in pricing a property accurately as a seller and making a fair offer as a buyer.
It's important to note that even though some terms may be unfamiliar, understanding them can help navigate the real estate market successfully. Professional real estate agents can also provide guidance and explain any industry-specific terms that may be confusing.
What Makes A Good Comparable?
Choosing comparable properties should be done in an unbiased manner, without being influenced by personal preferences or biases. It is important to select properties that are truly similar to the one being considered for purchase or sale, rather than cherry-picking properties that align with desired outcomes.
For example, it is not accurate to use a property that sold for a higher price as a comparable for a house that is being sold, simply because the seller wants the house to be worth more. Similarly, a lower priced property should not be used as a comparable to justify a low-ball offer on a house being purchased, if it is not truly comparable.
It can be challenging for real estate agents or appraisers to find properties that are truly similar to the one being sold or purchased within a recent time frame. Ideally, comparable properties should have similar characteristics such as:
- Similar square footage.
- Similar lot size.
- Similar age.
- Similar number of beds, baths, and other rooms.
- Similar condition. (Like how updated or clean it is.)
- Proximity to the subject property. (Ideally it should be fairly close by.)
- Similar neighbourhood or area.
- Sold and closed recently. (Within three months is ideal.)
In an ideal scenario, real estate agents or appraisers would be able to find a diverse set of comparable properties to determine the value of a property. This would include properties that are currently on the market, under contract, and have closed within the past three months. By using a combination of these properties, they can accurately determine the appropriate listing price for a seller or offer price for a buyer.
The Problem With Comps In A Shifting Market
Many experts in the real estate industry, government officials, and media outlets have noted that the market is currently experiencing a shift. However, determining the specific implications of this shift can be challenging as opinions vary. While prices have been high in recent years, it does not necessarily mean that prices are decreasing now.
Data and news reports suggest that there has been a decline in the number of homes being sold, and a longer time frame for homes to sell in certain areas. However, in many areas, prices have not decreased and in some areas they have remained stable or even increased.
It is important to note that the shift in the market is affecting different regions and price ranges in various ways. Therefore, it is crucial to rely on local comparable sales data to accurately determine the value of a home when buying or selling. National data and reports should not be the sole source of information when making real estate decisions.
But here are a few problems with comps in the current market that you need to be aware of:
Finding enough comparable properties to determine the value of a home can be challenging. Inventory levels have been low and continue to be low, making it difficult to find a sufficient number of properties to use in a proper analysis. Additionally, it can be challenging to find properties that are similar enough to the subject property.
It may be necessary to look back further than three months. While it is not ideal, low inventory levels may necessitate looking back further in order to find enough comparable properties. Also, it's important to note that closed sales data is a sign of market conditions from several months ago, as the closing process usually takes a month or two after going under contract.
It may take several months of purchases to determine if prices are truly shifting in a particular market. So, relying on the most recent data available and consulting with a local real estate agent is important to get an accurate picture of the local real estate market.
Sellers may be using past high sales prices as evidence that their property is worth a certain amount, while buyers may believe that prices should be decreasing due to market shifts and changes in interest rates, but lack concrete data to support lower offers.
In such a scenario, consulting with a local real estate agent who has experience and knowledge of the current market conditions can provide valuable insight. They can provide information on recent buying and selling trends, supply and demand in the local area, and how it affects pricing.
While comparable sales data can be useful in determining values, relying on a local agent's understanding of the market and its current direction can be crucial when the market is shifting. They can provide an accurate picture of the market before the data reflects it.
