Category Archives: Real Estate Data

What’s A Comp And Why Should You Care?

Sample Comparable Search in Woodland, CA

Two recent posts from my friend Jamie Owen at the Cleveland Appraisal Blog plus a planned realtor office visit inspired me to write this. Jamie did a great job blowing up the myth that comparable sales need to be within one mile of the subject in this post. He also tackled geographical competency, or the need to have boots on the ground knowledge about a market in order to credibly value properties in a second post.

Both posts touch on the subject of what is a comparable sale and why should anyone in real estate, or even the general public, care? The quick answer is that “comps” are the basis for how we, both those in the real estate industry and the man on the street, value residential real estate.

Per the Dictionary of Real Estate Appraisal, 3rd Edition, comparables are:

…similar property sales, rentals, or operating expenses used for comparison in the valuation process; also called comps.

Comps are used in the Sales Comparison Approach to Value, especially in residential real estate appraisal. All of us, appraisers, real estate agents, and folks considering buying a home, use the theory of substitution to determine the value of a home. What would the typical buyer shopping in that neighborhood buy instead of the subject?

A comparable sale is a sale of a home that the typical buyer of the subject would buy instead of the subject.

Subconsciously, everyone who owns a home compares it to homes in their neighborhood. We learn about a recent sale on our block and place a price on ours based on whether we think it’s better than ours, relatively similar, or inferior.  The formal version of this is the sales comparison approach used by appraisers.

We appraisers find the most similar sales, adjust the comparables for differences from the subject, leaving each adjusted comparable sale an indicator of value for the subject. The vast majority of single family residential appraisals in the US rely upon this methodology.

In the context of the sales comparison approach to value, the key is to identify the comps for the subject.

The easiest way to get the value of a single family residence wrong is to get the comps wrong!

As my mentor George Dell says, “What does similar mean?
(Now go subscribe to his blog. He’s really smart. Then take his classes)

Residential real estate, such as a house, a condominium, a home on a small acre lot outside of town, etc., have characteristics (“dimensions”) that serve as descriptions of a specific sale for a specific property. The more similarities between a sale and the subject under consideration, the better a comp. We can go into a deep dive, like George does in his classes; instead, I want to talk about what I do specifically for simple single family residential work in conforming neighborhoods.

Some examples of dimensions and characteristics important to valuing homes include transaction terms (financing, credits, etc.), motivations, location, views, quality, design, condition/age, floor area, and amenities.

Some dimensions/characteristics are more important than others and can vary dramatically in importance depending upon the location. For example, pools are valuable in the Sacramento region but have less value in the Pacific Northwest where the weather is cooler. Basements are common in the Midwest and East Coast but not so here. In the Whisper Creek Subdivision in Arbuckle, CA, a tract of large homes on half acre lots, RV parking is a significant factor unlike other nearby markets. This is why the geographical competency that Jamie discusses is so important. Appraisers with geographical competency understand what characteristics define a true comparable and get the subject’s value right.

Time usually matters except when it doesn’t. If a market is rapidly changing, using the most recent sales can reduce the impact of market change. When a market is relatively stable, time is less important and so using older comparables is reasonable. I downplay time frequently because time is usually the easiest and most reliable adjustment to make.

For a typical tract home in my area, the most important factors are motivations for the purchase or sale, time, location/proximity, and size/floor area. I start with a map search using my neighborhood boundaries and go back 12 months prior to the date of value for closed sales. I exclude from consideration REO sales, short sales, and other transactions where motivations likely had an impact on sale price.

I search for homes a little smaller than the subject because most buyers can make do with a slightly smaller home. Because the typical buyer can accept a larger home than the subject, I set the upper boundary on my floor area range wider than the lower bound. For example, if the subject has 2300 sf of living space, I will search for comparables with 2000 sf to 2800 sf of living space (300 sf smaller to 500 sf larger).

After I set my criteria in the MLS search, I run the search and review the results.

Metrolist Search Results
Search Results

I mentally draw a box around the subject’s important characteristics so I can place it in the competitive market. This is known as bracketing. Reasonably, would the typical buyer consider the sales found suitable substitutes for the subject? Are the sales similar in quality and design? Are there differences in lot size or age? Do I have larger and smaller homes? Do I have homes in similar condition, or inferior and superior? I try to account for every significant characteristic of the subject so I can show, by comparison, the value of the subject by using these comparables.

If I’m comfortable with the sales found, I can start my adjustments analysis. If not, I revise my search criteria and run the search again until I am happy that the sales found reasonably describe the subject.

Once I have my initial candidate comparable sales identified, I dig in and look for most representative comparables of the subject and decide on which sales to research further (view the exterior, contact agents involved in the transaction, etc.). I review outliers, sales outside the normal range, and try to determine why the sales deviate from the norm. I either adjust for the issue or remove the outlier from consideration. The remaining comps, after adjustment, are my indicators of value for the subject.

Comps are usually easy to find in conforming neighborhoods as long as the subject is similar to the rest of the neighborhood. When the subject is unusual, or when there are few sales available and they are all different (“non-conforming”), comparable selection is difficult. The appraisal becomes complex and beyond the scope of this article. I do have tips in my article about appraising complex residential properties.

How do you search for comparables? What are some tips for a real estate agent or new appraiser you can share?

Multiple Listing Service Reporting of Private Sales from an Appraisal Perspective

 

Today I was asked to comment on the issue of reporting private sales to my local multiple listing service (MLS) by a friend who works for Metrolist, the MLS for the Sacramento region. Today, Metrolist and most other local MLS systems do not allow for sales not sold through the listing service to be included in the sale databases maintained by these organizations. There’s a push within the residential real estate community to include this data. Here’s my response for why, from an appraiser’s point of view, I think it’s a bad idea:

As appraisers, data is our lives. We want available as much data as possible to help us value properties. By rule, we’re required to consider all competitive sales when valuing a property. The vast majority of assignments are for some version of market value. Here’s FNMA’s definition of market value:

“Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

  • buyer and seller are typically motivated;
  • both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
  • a reasonable time is allowed for exposure in the open market;
  • payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
  • the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.” (FNMA Selling Guide, Section B4-1.1-01)

This definition requires us appraisers to confirm some information regarding every sale used as a comparable in our reports. We must analyze each comparable we use in the sales comparison approach, the primary method for determining the market value of single family residential homes in the US. We must understand that both buyers and sellers do not have unusual motivations and that the comparable sale was properly exposed to the market so that all interested parties could bid on the comparable sale. The most widely used marketplaces in most of California are the various multiple listing services. Exposure on the local multiple listing service gives the widest viewing to potential buyers and allows for market mechanisms to arrive at the market value for any given home. Without this exposure, there is significant uncertainty whether the agreed-to price is market value or something else.

In addition to the value of having a central marketplace with mechanisms to arrive at a market value, the multiple listing services serve as a central repository of data. Most of the time, we can look at one central database and see all relevant property characteristics and data. Additionally, we have record of listing agents and buyer representatives who we are required to contact as part of due diligence. Some of the markets we cover have a significant percentage of sales not reported to the local multiple listing service. In general, we do not use these transactions in our appraisals because of the uncertainty of whether they sold at market value or not. For example, the for sale by owner that puts a sign up on his lawn may attract offers from people driving by but most likely he missed all potential buyers and may have sold his home too low. The “pocket listing” of one agent only marketed to agents in his office misses a huge pool of potential buyers. As appraisers, we can’t rely on these sales as primary data-we just don’t know if the sale price was market-derived.

I have worked extensively in Solano County over the past 15+ years. BAREIS, the multiple listing service for this area, has accepted sales data not sold through the MLS and reported it as “Sold Off MLS.” In the handful of years since this data has been offered, I have used it once in approximately 300 appraisals in Solano County. The sale used was included as secondary evidence for a very difficult assignment because this sale was not clearly a market value transaction. In more than 95% of assignments, I do not bother to check the “Sold Off MLS” sales. Even when similar sales are very difficult to find, the “Sold Off MLS” sales are not very helpful.

Does your local MLS system allow for agents to enter non-MLS sales into the database? Is this good or bad in your opinion? Why or why not?