What is a Comparable?

What is a Comparable?

Comparables are houses that are currently on the market, under contract, or (most importantly) recently sold. They’re used to compare against a house you’re planning to buy or sell to establish approximately how much it should sell for in the current market. This helps you price it accurately as a seller and know how much to offer as a buyer.

What makes a good comparable?

Comparables (aka comps) should be chosen as objectively as possible, not to justify what you hope to hear or think. Just because you want to sell for the highest price and hope your home may be worth more than the data shows, it doesn’t mean you can point to a house that sold for more and say it’s a valid comp. Nor can buyers use a lower-priced home as a comp to justify a low offer if it isn’t a good comparable for a house you’re trying to buy.

It can be difficult for an agent or an appraiser to find many (or even enough) homes that are truly similar to the house you’re selling or buying within a recent time frame. But ideally, they are looking for houses that have:

Similar square footage, lot size, number of beds, baths, and other rooms, and condition. Proximity to the subject property (Ideally, it should be nearby.)
Sold and closed recently. (Within three months is ideal.)

In a perfect world, they’d be able to find, at a minimum: three similar homes currently on the market. Three that are currently under contract. Three that have closed within the past three months. Then use all of them in combination to determine how much you should list a house for as a seller or offer for a house as a buyer.

It’s never ideal to look back beyond three months. Unfortunately, a house that closed within the past three months is often just a sign of what the market was like as much as four or five months ago because homes take a month or two to close after being listed, even if they go under contract quickly. So that data is more proof of what the market was like before or early in the shift.

Comps are a problem in the current “shifting” market. Almost everyone in the industry, government, and media seems to agree that the market is “shifting” right now. But it isn’t easy to pinpoint precisely what that means, and opinions vary from person to person. Considering prices were skyrocketing and at all-time highs in the past few years, you’d think prices would now coming down.

What else could this shift mean? Data and news reports indicate that fewer homes are selling. In addition, it is taking longer to sell than in the past few years. But here are a few problems with comps in the current market that you need to be aware of:

• There often aren’t enough of them. Inventory has been low and continues to be low, so it can be tough to find three houses in each category for a proper analysis. Beyond that, it’s tough to find enough comps for the property.
• We won’t see “proof” of values shifting for months. It may take a few months of purchases to tell the true tale to determine if values continue declining.

Sellers often hang onto “proof” that their house is worth a certain amount based on sales prices that occurred when values were higher. On the other hand, buyers often feel like prices should be coming down, based on news of the market shifting and the fact that rising interest rates have affected their buying power. Still, they don’t necessarily have “proof” to justify lower offers.

In the meantime, while the data catches up with the shift, your best bet is to rely on your agent’s experience and observations in the current market. What have they been seeing happen in your local area and price range? There may not be hard data to pull up yet, but a local agent is a good barometer for what buyers have been offering, how much sellers have been accepting, and how supply and demand have affected those two things in your area.

While comps are useful in determining values and how much to offer or accept for a house, when the market’s shifting, you need to rely on your agent’s ability to gauge where the market is currently going before the proof appears in the form of comps.

The Takeaway:
It can be challenging to find enough comps in a shifting market like we’re currently experiencing. Or get a true feel for where the market is going because it takes time for houses to close. Therefore, the data can lag a bit.

Your best bet right now is to use comps as a basis. While relying heavily on your agent’s experience and observations of what is currently happening in your area and price range.