Posted by Jonathan J. Miller -Monday, March 5, 2012, 1:58 PM
My friend Noah Rosenblatt over at Urban Digs has been pestering me to share some thoughts on what a “comparable sale” actually is. He and I often complain about how loosely the term is thrown around in the real estate community. This is being presented in the context of a single residential unit and I deliberately avoided using dry dictionary and textbook definitions.
The use of comparable sales are the basic ingredient for real estate appraisers and agents to vet out market value – so the similarity of it to the subject property (the property being valued) is paramount.
As an appraiser, I see the term “comparable sale” often abused. Some of it can be chalked up to inexperience and some of it to fraud. An illustrated deterioration of the slippery slope goes something like this:
Comparable Sale -> Sale -> Data -> Information -> Misinformation -> Fraud
A practical definition
A “comparable sale” is a sale that would be considered an alternative choice to a buyer that might purchase the subject property.
The sale should have a similar set of amenities (ie, size, condition, location, views, configuration, etc.) to be considered as an alternative choice for the buyer. However it gets tricky when the subject property is unique and there are few “comps” to use. Unfortunately it is often the case where there are no “comps” but that will be for another post.
And don’t forget to factor in concessions that might have been part of the “comp” sale. In most cases, the concession should be deducted right from the sales price since the “net” is what the buyer actually thought it was worth. Again there is a lot more too this but I think you get the idea.
One important thing to keep in mind: One “comp” does not make a market. In other words, a market is defined by a general pattern, not one sale. The sale could be an outlier and not reasonable if it is out of sync with everything else.
Not always a “comp”
From practical experience, I have observed that a sale is not always a “comp” just because:
- it was given to you by a real estate professional (i.e. appraiser/agent)
- it was used in a report
- it was close in proximity and recently occurred but would attract a different buyer
- the “comp” provider was familiar with it (i.e. appraised it, sold it) but otherwise not similar
In real estate appraising, comparable sales are presented in the report and adjusted for their differences with the subject property (the one you are appraising). The more adjustments that are needed to be made, the less “comparable” the sale is. A reader who may or may not be familiar with the market the property is located within can should be able to use them to make a more informed personal/business decision on the asset (house) being valued.
In real estate brokerage, agents use “comps” to establish the market value of the potential listing and use the value to develop a pricing strategy (ie listings are not “comps” without considering some sort of listing discount).
Comparable sales are nearly always a closed transaction but don’t get hung up on that. They can be pending sales and listings as well.
Appraisers, especially AMC appraisers often without local market knowledge claim they are mandated to only consider “closed” sales as “comps”. Wrong. Total cop out. Lazy. Incompetent.
I like to use the word reasonable when looking at a sale being considered as a “comp” to the property being valued. While housing sales are not like snowflakes (ie no two are the same), remember to ask yourself whether a theoretical buyer for the property being valued would consider the “comp” as an alternative to purchase.
Then catch it on the tip of your tongue.