One of the most common and useful techniques used by both Realtors® and real estate appraisers when asked to evaluate the value of a home goes by a number of names including the market comparison approach or the comparative sales approach. Often we hear Realtors® talk as well about providing a free CMA, or Comparative Market Analysis, based on this approach as well.

Like every profession, Realtors® have their abbreviations and shop talk buzz words, so you’ll often hear us calling the comparative sales data we use “the comps”.

Running and using “the comps” is simple in principle (and often in practice as well). You take the home you’re trying to get a value for, then look for similar properties that have sold recently to see what the similar properties sold for. The core concept that underlies the market comparison approach is the principle of substitution, which says that the price a consumer will pay for an item is limited by the price of available substitutes. So a plastic ball point pen allows you to sign a $1,000,000 check, or write the great American novel, and it may have cost millions to create a ball point pen factory, but if other ball points sell for 79 cents, you’ll probably go out of business trying to get $100 each for a plastic ball point pen.

Simple, right?

OK, so how does it work out in practice?

Well, in practice, comps are easiest to get and use when there are a large number of similar properties available that sold in a short time. So it’s easier to run comps for homes that are abundant in their market. A three bedroom two bath home in a residential neighborhood with lots of such homes is easy to run comps for, whereas a home on acreage in a rural area where only 20 homes sell every year anyway is more of a challenge.

The first task is to find similar properties. What I usually do is begin with properties that are:

• Within the same zip code as the target property.
• Within as small a radius as I can draw while still getting a good number of comps.
• Are not more than 100 square feet bigger or smaller than the subject property.
• Are not more than five years older or newer.
• Have the same number of bedrooms and baths.

Usually I like to have as many comps as possible. A formal appraisal usually looks for three active homes (homes on the market today), three that sold within the last six months (though three months is better), and three that are pending sale. What I will generally do is try to get to at least three to five sold comps, and I’ll adjust some of the factors above as needed. For example, I may start with a 1/4 mile radius, and if that doesn’t work, switch to 1/2 mile or more as needed. Or if there aren’t enough comps, I may also look at homes that were built more than five years before or after the target home, etc.

Once I have the comps, it’s a simple matter using our MLS software to run a quick “CMA” report. Here’s an example of such a report, for a home I picked pretty much at random. This is a home where the list price of $399,900 seemed a bit high to me, so I thought I’d see if I could illustrate how I came to that conclusion by way of such a report.

Looking at the report, we see first of all that the average list price for active homes and the average sold price are not too far apart, at $369,708 and $362,714. Usually, an appraiser is especially concerned with the sold comparables, and tend to ignore the active and pending when coming at an upper limit of value. Many sellers have found (sometimes to their dismay) that their home will not appraise for a value higher than the value of the highest sold comparable.

So on a first glance, $399,900 is indeed high, both in terms of the average available property and the average sold property. Of course, there’s always that home on Kingsmill that sold for $420,000, however, looking at the listing in that case, that home had several improvements such as a pool and koi pond that affected its value. And in any case the most reasonable approach to value is often to take the fat end of the bell curve. A comp of $420,000 doesn’t make the average home worth $420,000 any more than the comp of $330,000 makes it worth $330,000.

Without making too many adjustments (which is a separate art), let’s at least see if the $399,900 price can be justified somewhat in terms of its actual square footage. The average sold price per square foot for homes we’ve already identified as comparable is 266.33. Multiplying that back out by the square footage of our actual target property, we come up with a figure of $372,765.50. So $373,000 — more or less — is the expected value of the home based on the averages. Based on averages again, the list price should be about $374,900. So this home is — in one broker’s opinion, and based solely on comparable data — about $25,000 high given the current market.

Please note that the information given here is for illustration purposes based on computer data, and is not meant to be used as an actual estimate of value of any specific property. Parties interested in any of the properties used in this illustration should go through a more formal process of on-site due dilligence and consult a real estate appraiser in the course of their purchase.

blog comments powered by Disqus