Jeffrey is a Real Esate Broker,
blogger , big thinker
When I sit down with a client to determine the value of their home, I can get as technical as a computer science engineer, I can opine about trends, absorption rates, current inventory, CAP rates, but as for 99% of time it will come down to something called “comps.” Comps short for comparable sales or comparables are similar properties that have sold recently or are currently listed. Some times I think of “comps” as competition, because the clients home is in competition with the comps for buyers.
The comps matter, for buyers they can know if the homes price is a fair price way to high or a sweet deal. Comps make buyers into smart negotiators.
For Sellers the comps are even more important, they can help you nail your list price to attract the most buyers, and avoid having your property on the market for a long time.
If you are getting an appraisal the Appraiser will use comps to determine the property’s value. The appriaser will use the very same comps as your Realtor, oinly with more detail and scrutiny.
The price we arrive at should reflect your real estate goals , net the seller the most amount of money and sell as fast as the sellers want with the terms the sellers want. Accurate pricing is the most important part of pre-marketing and if we nail the list price we can attract more than one buyer.
Usually a Competitive Market Analysis is the first thing we do. Some people just want to know how much their home is worth, while others need cash now.
You can learn my pricing strategy here https://frdmi.com/how-i-double-the-exposure-of-my-listings-using-price-bracketing/
So what are comps and how are they used. Appraisers have strict requirements for comparable sales that they must conform to as much as they can. Comparables should be in the same location as the subject property, they should have the same quality, design, same amount of bedrooms , bathrooms and square footage, be the same age in a perfect world the properties would be identical, but they rarely are, the best we can hope for is similar. However there are certain catgergories that are immutable, for expample you would not compare a waterfront property to a property that has no waterfront, or a stick built home to a manufactured home. Some crieteir are more important than others.
When the location, size, condition or features are different we use the sales comparison model to reconcile the price, adjusting a mostly fixed amount for differences, for example we adjust $5 / square foot for properties that are with 20% of each other in gross living area (that includes all finished living area).
We always adjust the price of the subject property because that is what we are solving for. Pricing adjustments reconcile the price to the subject property. A good comp with have fewer adjustments, while a less similar comp will need more adjustments.
I’n general we want at least three sold comps ( within 90 days ) and three listed comps that are in direct competition with the subject property. There should be one comp that is inferior to the subject one that is superior and one that is equal. This is important to bracket the price.
This doesn’t always happen, and in some markets ‘I perform in it is rare to find comps that meet all the criteria, thats where local expertise comes in. If we cannot bracket the subject property in the area we havre to expand to adjoining areas that are similar, even if they are further away.
Real estate agents use a fixed scale of comp evaluation that depends on the agent – most agents use a simple, superior inferior or equal designation to determine the quality of the feature of the comp. For example the subject property is beautifully landscaped with excellent curb appeal while a comp has no landscaping , or is poorly maintained, in this example we would say that the comp is infer in landscaping, curb appeal or site value.
Appraisers use more specific gradientions to describe the subject and comps. You don’t need to know all these but the idea is helpful to understanding appraisals [https://en.wikipedia.org/wiki/Uniform\_Standards\_of\_Professional\_Appraisal\_Practice](https://en.wikipedia.org/wiki/Uniform_Standards_of_Professional_Appraisal_Practice), if in the case of an appraisal not meeting the sales price it is good to have a understanding of the language of appraisers in order to work with the appraiser to establish the value for the sale of the home.
The purpose of the appraisal affects the value assigned to the subject property. Seams counterintuitive, appraisals are to establish an idea of nom biased market value. Not necessarily, appraisals are mostly done by banks to make sure that they the property is worth what they are lending on it.
Sometimes I run into clients who want to sell their home and they’ve had a recent appraisal. This is good because it give me a baseline to establish the price, but sometimes it can be inaccurate, or even way off. Who knows what’s happened in the market since that appraisal was performed.
Other methods of establishing value begin with the question – is the property in its highest and best use? For example a home that someone lives in is sitting on top of a vast mineral deposit that is worth a tremendous amount of money, we should not use a similar comp to determine value, we should add up the value of the mineral deposits, minus the cost to extract the minerals to determine the value, so in this example a home for people to live in is not the highest and best use.
There are so many online tools like a Zestimate, or other value estimators online that can be helpful to make sure that you are own the right track. We Realtors have better tools than that we use proprietary software that estimates the value of a property almost instantly but it goes a step beyond just a price , it give us a confidence score, about how accurate that price may be.
Where does this value come from? Thats a good question Im not a fan of the “Zestimate” I think it can be way off, but It is based on property assessment data. In Michigan in general the SEV (stage Equalized Value) is roughly half the “ cash value” of the property. These can be accurate or inaccurate depending on the purity but it is aa good guideline to sue if our valuation is way different than the computer value, and if the condition or material or functional aspects of the property haven’t changed maybe you’d better take a look at the comps.
Real Estate is not 100% liquid each house is differnt and the market changes a lot, so the valuation provided by the CMA is not always locked in stone, it is just one of the tool in our tool chest to maximize our sellers return, protect our buyers interest and provide as much certainty as we can.
Jeff Bucholtz is a Real Estate Broker based in Three Oaks MI.
He has sold more than 100 Million Dollars in Real Estate.
He is the Broker and owner of Freedom Realty.
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