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When you're buying a home, you don't want to overpay. When you're selling a home, you don't want to be underpaid. This is where real estate comparables, or comps, can come into play. Comps are similar homes that recently were sold in the same vicinity. Real estate comps help pinpoint a home's market value by providing a value that's comparable to the home you're looking to buy or sell.
Here, we open the door to details you need to know about real estate comps.
What Are Comps in Real Estate?
Real estate comps are used to see how the value of a home stacks up against the value of similar homes in the same relatively small geographic area. Among those who rely on real estate comps are homebuyers, home sellers, real estate agents, real estate appraisers, mortgage lenders and home insurance companies.
Factors that go into coming up with a real estate comp include:
- Location: To help ensure a comp is as precise as possible, nearby homes compared with a home you're trying to buy or sell typically should be within a 1-mile radius, but may be a little farther afield.
- Timing of recent sales: So that a comp reflects the current state of the local home market, it typically should look at nearby homes sold only within the past three to six months.
- Size: In this case, size refers primarily to a home's square footage. Each home that's part of a comp should be close to the same square footage. In other words, it wouldn't make sense to compare a 1,500-square-foot home with a 3,000-square-foot home to determine a fair price. The same recommendation holds true for the size of each home lot.
- Condition: All of the homes included in a comp should generally be in the same condition. They also should have been built around the same time. Translation: A comp would be thrown off if you compare a 5-year-old home that's in tip-top shape with a 50-year-old home that needs some TLC.
- Features: Aside from size, condition and age, one home should be judged against other homes that have similar features. These include the number of bedrooms, number of bathrooms, renovation history and presence or lack of a garage.
Who Uses Real Estate Comps?
A variety of people depend on real estate comps. Among them are:
- Homebuyers: Comps can help a prospective homebuyer figure out whether a home price is in line with the local housing market.
- Home sellers: A home seller can use comps to help determine a reasonable list price.
- Real estate agents: A real estate agent can lean on comps to help decide the value of a home and its list price, with the goal of setting a price that's attractive to both the seller and prospective buyers. In this process, an agent might examine at least three or four comps.
- Real estate appraisers: An appraiser takes real estate comps into consideration when calculating home values. The appraiser gets the final word on the market value of a home.
- Mortgage lenders: With comps, a mortgage lender can better weigh whether a home is properly priced and whether the loan amount aligns with the home's value.
- Homeowners insurance companies: Comps help insurers come up with proper coverage and adequate premiums for homeowners insurance policies.
How Are Comps Used to Set an Asking Price or Offer Amount?
Relying on exclusive data as well as their experience and market knowledge, a real estate agent can calculate an asking price for a client's home. In the same vein, comps normally are part of the formula for an agent to suggest how much their client should offer for a home. Based on comps, an agent might recommend, for example, that a seller spruce up their front yard or repaint the exterior before putting their home on the market.
What follows is an example of how, in conjunction with their agent, a buyer can use comps to submit what could be a more competitive offer.
A home you're thinking of buying is priced at $335,000. It's a 2,250-square-foot home that was built in 2010 and has three bedrooms and two bathrooms.
In the same neighborhood, a 2,400-square-foot home with the same number of bedrooms and bathrooms recently sold for $338,500. This home, also built in 2010, is bigger than the home you're targeting.
Elsewhere in the same neighborhood, a 2,250-square-foot home built in 2010 recently sold for $318,500. Like the other homes, it has three bedrooms and two bathrooms. However, the home that went for $318,500 has fewer upgrades than the home you want.
Based on these comps, you and your real estate agent might split the difference between the lower-priced home ($318,500) and higher-priced home ($338,500) and settle on an offer of $328,500. If the seller accepts this offer, you'd be shaving $6,500 off the list price.
How Do I Find Real Estate Comps?
Real estate agents typically provide comps to their clients, either at a client's request or as part of the normal course of doing business. Agents tap into private multiple listing service (MLS) databases to do comps research. Unless you're an agent or you've hired one, you don't have access to MLS information.
So, what do you do if you're not an agent or don't have one? You can find free comps from sources such as:
- Online real estate marketplaces: The internet hosts a wealth of options, including Realtor.com, Redfin, Trulia and Zillow. Keep in mind, though, that the information you dig up on these platforms might not be as accurate as MLS data pulled by a real estate agent.
- Public property records: In most cases, the county where the home was sold maintains a record of every piece of property that changes hands there. You might be able to look up the records online, or you might need to make a trip to the county courthouse. It's worth noting, though, that these records may not give you a complete picture of a home sale. For instance, the records might not show any concessions made by a seller, such as a credit given to the buyer for certain needed repairs.
The Bottom Line
If you're eyeing a home purchase, you certainly should take a look at the real estate comps before making an offer. And if you're taking out a mortgage for the purchase, you also should take a look at your free Experian credit report. Doing so enables you to search for errors that might be bringing down your credit score, which could affect your ability to get a lower interest rate on a mortgage or to qualify for a mortgage in the first place. Reviewing your credit report well ahead of applying for a mortgage gives you time to fix incorrect, damaging information and potentially improve your chances of approval.