Tips & AdviceHow to Find Comps in Real Estate

How to Find Comps in Real Estate

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Investing in real estate can be highly lucrative. Whether property buyers wish to hold onto a valuable asset or generate rental income, they all share a common goal of generating a profit. Buyers and sellers consider their financial objectives when conducting real estate activity to find a transaction that fits their monetary needs. Therefore, they must gather information to make intelligent choices about the property they wish to buy or sell.

This article explores how buyers and sellers can use real estate comps to influence their buying and selling behavior.

What do Homebuyers and Real Estate Investors Care About?

There is a difference between people who buy real estate and people who are real estate investors.

People who buy real estate for personal purposes, while aware of the financial consequences of their purchase, will be much more concerned with personal factors like the quality of the home, school districts, and proximity to work. They will also consider how profitable their home will be should they decide to sell in the future.

Real estate investors, however, care more about financial factors like a property’s appreciation rate, the current and future rental market, and cap rates. Investors, therefore, want to guarantee they find a property that returns a significant value.

Naturally, homebuying raises the question for both personal buyers and investors: How can I genuinely tell when a property is “fairly priced”? To help determine if a property has a fair price, buyers and investors can look at real estate comps.

What are Comps?

In real estate, the word “comp” is shorthand for a comparable property. Buyers look for comps to determine whether or not they are going to get a fair deal. Sellers look for comps to determine what they could realistically sell their home for on the open market.

In some cases, finding “comp” houses can be relatively easy. For example, if your next-door neighbor just sold a home structurally identical to your own house, you will already have a pretty good idea of what you could get if you chose to sell.

But in other situations, finding an accurate comp might be quite a bit more difficult. If you live in a home that is in an isolated location, is structurally unique, or has not been sold in a very long time, then you might not have any idea what your home is worth. Even if you can find property value estimates online, it is in your best interest to conduct additional research.

Who Typically Finds Comps?

Real estate agents generally use a multiple listing service (MLS) to generate a list of compatible real estate properties for their clients. Agents present their clients with comps towards the beginning of the buying process once they establish their budget and desired location. On the seller’s side, an agent offers their client a list of comps while determining the listing price.

How Do Sellers Determine a Sale Price?

When putting their home on the market, most sellers ask, “how much did I originally pay for this home?”

Even during recessionary periods (think: 2008), homeowners want to sell their homes for more than what they paid. Their original purchase price serves as the bare minimum for the current listing price, where sellers look to profit off of the home sale.

Home Appreciation Rate

Many factors help increase the price of a home throughout ownership, allowing the seller to list their property at a higher rate than what they bought it for. During normal economic growth, the average price of a single-family home in the United States increases by about 10 percent per year. At this rate, ignoring all other factors, that means that if you purchase a home for $300,000, it will be worth $483,000 in just five years.

Keep in mind that this can be an aggressive growth projection. However, even if you assume a five percent appreciation rate, that $300,000 property would be worth about $383,000 in about five years. Additionally, changes in the inflation rate might also cause housing prices to increase. This year, high-interest rates influenced market conditions and caused housing prices to grow 33% from Q2 2020 to Q2 2022.

How Do Buyers and Sellers Use Real Estate Comps?

As a base metric, sellers will look at their initial price, expected return on their investment, and the inflation rate before proposing a price to the general market. They will also need to consider the factors specific to their property, namely, how nearby properties have changed over time.

Comp properties are a useful resource for determining a property’s true worth. The general trends that affect nearby properties will also affect your property, and you can analyze a comp’s price point to see how they responded to influential market factors. Keeping this in mind makes it significantly easier to determine a fair price for a property and, consequently, determine other factors, such as how many days you can expect the property to remain on the market.

Components of Strong Real Estate Comps

Ultimately, whether a comp is good or bad depends on whether the property’s value can accurately project the prices of other properties. As suggested, a nearly identical comp, such as a property of the same size and layout that recently sold in the neighborhood, will be more valuable than a comp with differing qualities.

A strong comp possesses a few distinguishing characteristics. The comp should reside in the same neighborhood, including the school district and municipality, as its various alternatives. It will also have a similar level of square footage, will have been built in a similar year, and might even have the same architectural style as the alternatives.

Another home does not have to be an exact match to be a worthwhile comp. A property may have different features, be built in a different decade, or reside in a neighborhood across town. If that property has enough similarities, it is still a strong comp.

Comps in Suburban versus Metropolitan Areas

Sellers who own a home in a suburban neighborhood can look to properties around the block to find comps, as developers likely constructed the entire block’s worth of homes in the same timeline. Some owners may upgrade their property and add additional features like in-ground pools or finish the basement. Sellers should consider these add-ons compared to their property when determining a sales price.

Those looking for comps in a city can look for properties in the same building, especially those on the same line, as they usually follow the same layout and size. However, it is important to note that some owners may renovate their condos and co-ops, especially in older buildings. Buyers and sellers must account for the style and modern features of the property in question when determining the strength of the comparable unit in the building.

How to Find Real Estate Comps

While buyers and sellers may rely on an agent to help them find comparable real estate properties, they can also research strong comps. When looking at listings on RealtyHop, users can scroll through the listing page to find a table called, “Comparables”. This table directly links to any comps and provides information about the property type, size, and price.

Conclusion

Comps are valuable tools to help both buyers and sellers determine the fair market price of a property they wish to purchase or sell. After sellers account for appreciation, they can consider what comparable properties sold for in their neighborhood or building to influence their market price. Buyers can view the comparable properties of a home they wish to buy to ensure they submit a strong offer. In real estate, having access to more data and knowledge can save, or make, thousands of dollars.

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