My recent post on appraisals generated some thoughtful and insightful comments. One noted some folks may not really know what a “good comp” is. That got me thinking.
Sometimes we “more experienced” investors forget that people new to the real estate investing world are hearing many of the terms that we widely use for the first time. “Comp” is definitely one example.
So let’s start at the beginning.
What is a “Comp?”
Comp is short for comparables. Comparables are certain properties that are used to evaluate another property. Comps are often used by appraisers to estimate market value, by realtors to determine a probable sales and/or asking price and by governments for property tax purposes.
So, what is a “good comp?”
Let’s take a look.
What to Look for in a Good Comp?
A “good comp” will have several characteristics.
- The comp should be in the same general area. Remember, location, location, location are the three most important things driving value in real estate. In my part of the world, for example, similar homes only a few blocks apart can vary widely in value.
- It will be a similar property. If you are trying to determine the value of a three bedroom two bath home you do not want to look at commercial properties. Rather, you want to find other three bedroom, two bath homes.
- The comp shoud be similar in size. If your property has 1,500 square feet of heated space, you should look for properties with similar sizes. 800 and 3,000 square foot homes are generally not the best comps.
- The comp should have other similar features if possible. These could include items like a two car garage, a similar sized lot, fireplaces, central heat and air, etc.
- The comps should be similar in age and condition. New “infill” homes in an older neighborhood may not compare well with the older homes. Further, the property’s condition will also make a difference. Look for comp properties that are in a similar condition.
- The comps should have been sold fairly recently. Within the past 90 days is best but really no more than 6 months. The market can just change too much in that short period of time.
- The best comps are those which are so called “normal sales.” That is a sale between a willing seller and a willing buyer. The seller should be non-distressed, that is, the seller should not be a bank, estate, tax sale, etc. The best comps are those that are between a non-distressed buyer and seller on the open market.
So there you go – those are the basics. There are many other variables that can go into determining a property’s probable market value. But if you can find at least three or four properties (comps) that meet the above criteria, you will have a pretty good idea of the market value for your property.
Related: What is Market Value?
Sometimes however you will not be able to find any good comps. The only sales may be foreclosure sales, your property may be very unique or there may not be any recent sales at all. These situations make valuations much more difficult but not impossible. It is situations such as these when a good appraiser maybe well worth the expense.
What are your experiences these days finding and working with comps? Are they easy or difficult to find? Any unique experiences you want to share? Please let us know in the comments.