When you’re new to house hunting, there’s a lot to learn. Understanding the importance of housing comps, how to identify them, and how to use them in the negotiation process can help you make a successful and fair offer on a home.
What Are Housing Comps?
Housing comps are recently sold properties that are similar to the house you’re interested in buying. In real estate, housing comps are used to estimate what a specific property is worth based on market data.
What Are Housing Comparables Used For?
Housing comps are used by buyers, sellers, real estate agents, and lenders, but they play a different role for each party.
- Buyers use housing comps to evaluate asking prices for properties. If comparable homes have sold for less than the asking price, the buyer can use that to negotiate for a lower price or for more concessions. If recent comps sold for more and the market is competitive, buyers may want to move more quickly or improve their offer.
- Sellers use housing comps to decide how much to list their home for. When offers come in lower, sellers can use the sale prices of comparable properties when negotiating with buyers.
- Real estate agents use housing comps to advise their clients, whether those clients are buying or selling. They also use them to steer buyers toward properties where comps are within their price range. Finally, real estate agencies use comps to identify market trends, which helps them determine negotiation strategies.
- Lenders use housing comps to determine if a loan amount is reasonable for a particular property and to verify that the property is adequate collateral for the loan.
Characteristics of Good Housing Comps
To identify suitable housing comps, you can’t rely only on houses that are similar in size and condition. Good comps are matched on a number of characteristics, including:
- Physical proximity to the house you’re interested in. Ideally, comps are located within a half-mile radius.
- Recent sales dates, ideally within the past 3 to 6 months.
- Similar size and layout. The square footage should be within 10% to 20% of the home you’re interested in, and the number of bedrooms and bathrooms should match.
- Comparable property type. For example, a single-family detached home isn’t comparable to a townhouse, and a single-story ranch-style home isn’t comparable to a two-story colonial, even with the same square footage.
- Similar age and condition.
- Comparable lot sizes and features. For example, waterfront properties should be compared to other waterfront properties, and properties backing onto parks should be compared to other properties backing onto parks, golf courses, or other green spaces.
It’s not always possible to find comps that match this closely. If that’s the case, use properties that match on as many characteristics as possible and make adjustments accordingly.
How to Locate Housing Comps
Use the following resources for researching housing comps:
- Your real estate agent is the best source for housing comps. They have access to databases that show detailed information such as final sale prices, days on the market, and features of the properties.
- County assessor websites can be used to supplement other sources of information. Although they do have public records of property sales, information about property details is limited.
- Your appraisal report will have information about housing comps. Although you won’t have this report until after you make an offer, you can use it for further negotiations if the appraisal comes in lower than your offer.
In most cases, buyers rely on their agents to identify housing comps for them. However, if you’re just getting started and you don’t have an agent yet, or you’re just interested in market trends, you can certainly get started with these sources.
Analyzing Housing Comps
Once you’ve collected comparable sales data for at least 3 to 6 homes (more is always better), you need to analyze the information.
- Compare the key features systematically. You might find it helpful to use a spreadsheet or chart with columns for square footage, price per square foot, bedrooms, bathrooms, lot size, age, special features, sell date, and sale price. Having all this information in one place will make it easier to see patterns and differences between properties.
- Make adjustments for differences between each comparable and the home you’re interested in. For example, if a comparable home has an updated kitchen, subtract $15,000 to $20,000 from the comparable’s sale price to make it more of a level comparison. If the home you’re interested in has a finished basement but the comparable doesn’t, add $15,000 to the comparable’s sale price. Consult with your real estate agent on these figures.
- Adjust for market conditions if the comps sold more than a few months ago. If prices have risen since the housing comparable sold, you will need to add to the comparable’s value.
- Weigh the most similar comps more heavily in your analysis. A nearly identical home 2 blocks away that sold last month should influence your estimate more than a reasonably similar home a mile away that sold 5 months ago.
Housing comps typically yield a range within which the target property should fall. This range should account for differences between the housing comps and the target property, as well as market fluctuations.
How to Use Housing Comps to Make a Strong Offer
Once you have a range of values for your target property, use this information to put together a competitive offer.
- Starting with the market value based on your housing comps analysis, adjust your offer to current market conditions. For example, in a seller’s market with low inventory and multiple offers on each property, you may need to go over the value of your housing comps.
- If the home needs significant repairs or has updates that your comps don’t have, factor those into your offer.
- Use the comps to justify your offer and in any negotiations that follow. Having objective data shows that you’re being fair and reasonable and not trying to lowball the seller.
- If your appraisal comes in below your offer, go back to your comps to negotiate a lower price. If you’re not successful, you can walk away from the deal if your contract has an appraisal contingency.
Housing comps play a very important role in buying, selling, and appraising real estate. Identifying and analyzing them takes skill and knowledge, but that’s where you can rely on your real estate agent. Understanding how housing comps work and how you can use them goes a long way toward making the home-buying process smoother and less stressful.
