They say things happen in groups of three. I don’t know who “they” are, but “they” do seem to be right.
In the last few months, I’ve had three clients tell me they don’t care about comps, and one even told me comps make him angry. I have a hypothesis about those sentiments that I’ll get back to later.
Comps is a word often used in real estate by Realtors, appraisers, lenders and almost anyone associated with the real estate business. Comp is the abbreviation for “comparable market value,” which is a valuation calculation performed, discussed and argued constantly.
The purpose of these calculations is to determine, as close as possible, what the correct value or price of a given property should be. It could encourage sellers to price their home correctly, or assist buyers in understanding what a reasonable offer should be. Most homes will be financed, so the appraiser will also need comps when evaluating the property for the lender. Opinions of property value are as varied as the multitude of people who perform them. Ultimately the market will decide what a home is worth and if it is priced too high, it probably will not sell. If it is priced too low, you may receive multiple offers driving it back to market value. In the end, the market will speak and will prove to be a great equalizer.
Realtors comp properties in a variety of ways. At one time, the county was broken up into “areas.” One could simply enter the area number to see all the activity in that area. Others use a radius around the subject home to find comps and depending on the density of the area will use 1/3 or 1/2 mile radius. In the case of rural property, the radius might be two or three miles. I prefer to use a narrow search area that I can map using major streets as borders and I attempt to restrict my search to the same builder.
Many neighborhoods are built in phases over decades and may include 40-year-old homes bordered by much newer homes. Although the values might be similar, in most cases newer homes are worth a bit more. My main concern with “area” mapping was it covered such a broad area that it crossed over many neighborhoods, major streets, school districts or builders.
Getting back to my three clients that didn’t appreciate the science of comps: why should a person like or dislike the comps used by a broker? I would submit that if the comps support or increase the sellers perceived value of their home, the seller will agree enthusiastically. If the seller wants more than the comps support, they will be less enthusiastic and possibly angry. The seller, who has lived in the home, decorated the home, raised their kids in the home, celebrated multiple life events in the home and has built immense sentimental value in the house, will always see the home through those memories. Those memories and life events are priceless to the seller, they are not priceless to the potential buyer.
Conversely, a buyer may not agree with comps either. Buyers often expect homes in this market to be perfect, and that comps should reflect a perfect home, perfect floor plan and in perfect condition. They often suffer from sticker shock and can’t comprehend that a home that needs updating and/or repairs could cost as much as they do. These buyers often feel that the comps are too high. They will say things such as, “I wouldn’t pay more that X for that house,” which is usually low and unrealistic.
Better Realtors do a good job of coaching buyers and sellers on the current market. They explain the local values, explain variances between homes and neighborhoods and can make sense of all the data. Often this helps, other times people are simply upset.
