What Are Comparable Sales For Buying or Selling a Home?
Who do you think cares more about comparable sales? Home buyers or home sellers? Are comparable sales more important to a home seller or do home buyers place a higher level of importance on comparable sales?
Home buyers don't often ask about the comparable sales, but they should. When a home buyer tours homes, that buyer is comparing homes for sale with other homes for sale. The only thing a buyer knows is how much the seller down the street is asking for a similar floor plan.
What Makes Up a Comparable Sale?
Comparable sales, or "comps", are the sales prices of similar homes that have sold. Comparable sales are not active listings nor pending sales, as those values do not carry the same weight as a home that has already sold. Comparable sales are used as an example to justify why a buyer doesn't want to pay more than the last guy paid for a similar home.
Here are the main components of a comparable sale:
- Recent time frame of sale. Many years ago, appraisers used to go back six months in the public records to pull comparable sales. Since the 2007 sub-prime mortgage meltdown, that time frame has considerably tightened. Nowadays, appraisers generally use only the last three months of comparable sales.
- Close proximity. Ideally, a researcher would consider sold statistics within a certain radius, typically within a ¼ to ½ mile of the subject property. The closer the better. A home that fronts a busy street would be worth less than a home facing a lake.
- Similar square footage. You can’t take the price of a 1,000 square-foot-home and double it to determine the value of a 2,000 square-foot-home. That’s because the per-square-foot cost of smaller homes is higher than the per-square-foot cost of a larger home. Ideally, you want to compare homes within 10% of your subject property's square footage.
- Similar age and construction. You will hear people say: They don’t build homes like they used to. But it doesn’t necessarily mean older homes are better than newer homes. The values, however, are different because of character and appeal. A tile roof, for example, can enjoy a 50-year life over the 25- to 30-year life of a standard composition shingle.
- Similar lot size. In some newer home tracts, you might find a mix of lot sizes. For example, a zero-lot line means the home really doesn’t have a yard. The side or back yard might be very small without grass or vegetation, which typically do not appeal to families with children. Many areas compute lot size based on actual square footage divided into 43,560 square feet. An acre is 43,560 square feet. A quarter of an acre, or 10,890 square feet is .25 of an acre.
- Similar condition. Unless you are working with a neighborhood specialist who has intimate knowledge of the condition of most of the homes in a specific area, it can be hard to determine the condition of a comparable sale. A stripped foreclosure home owned by the bank, which is missing its appliances and copper plumbing, is worth much less than a turn-key home, updated with new appliances, carpeting, and paint. If you’re really lucky and you’re comparing homes in a subdivision, you might find exact model duplicates to use as comparable sales.
Why Should a Buyer Care About the Comparable Sales?
A seller can use comparable sales to justify his or her asking price to the buyer. However a buyer will ultimately pay an amount they believe is a fair price. You have probably never heard a buyer say,“I should have paid more for that home.” Buyers generally want to pay less.
To the contrary, buyers sometimes worry that they will pay too much for a home. Especially when they are buying in a down real estate market. No buyer wants to find out that the home they have just purchased is worth less than its original price.
If the buyer is obtaining financing, a bank’s appraiser enters the picture. Banks also want to protect their investment and the security for their investment. That’s why banks hire an appraiser at the buyer’s expense to determine and justify value. However, appraisals are an opinion of value. An appraisal is only as good as the experience and knowledge of the person who prepared it.
If the buyer’s appraiser submits a low appraisal, the seller has the option to lower the sales price. If the seller refuses, that’s when a buyer might contest the appraisal. Buyers can contest the appraisal by submitting comparable sales.
While it is possible to adjust an appraisal for outstanding factors when the comps are few and far between, the best comparable sales will always be those with criteria that fit most closely to that of the subject property. Ask your real estate agent to prepare the comparable sales.