What does your real estate agent mean when they say the word “comp?” It’s short for “comparable” and is one of the main things used to help gauge a home’s value. Here are a few of the main things that come into play here.
Does it make sense to compare two homes that are 50 miles apart? No, of course not. How about 20 miles apart? Probably not. How about 5 miles apart? Even though it’s closer, you can still have a big difference in home prices 5 miles apart.
Generally the closer you can get, the better. The best comps are the ones in the same neighborhood as the property for sale. If there aren’t many, you can expand to the nearby neighborhoods, but going more than a few miles away starts pushing it.
There are a few reasons for that:
Location is very important, but there are other important factors to look at.
Even if they’re in the same neighborhood, should you compare a 1,600 square foot ranch to a two story house that’s 2,500 square feet? You can, but it’s not a very good comp. That’s because square footage should generally be within 25% of each other. The 25% range of the 1,600 sq ft home is 1,200 – 2,000 sq ft, so the bigger home is out of the recommended range.
In some neighborhoods, almost all of the homes are very similar in size so this may not be an issue. But other neighborhoods – especially older ones – will have major differences between the homes.
The number of bedrooms and baths in a home vs. nearby comps will always come into play. Even if two homes are similar in size, the comp may be less meaningful if one has many more bedrooms and baths compared to the other. For example, what if one 2,000 sq ft home has 3 bedrooms and 2 bathrooms but the 2,200 sq ft home down the street has 5 bedrooms and 4 baths? That’s a big difference and makes them harder to compare to each other.
Timing and Home Comps
Homes used for comps should only be the ones that have sold fairly recently. If you’re buying a home in August 2020, are you interested in how much a home sold for in April 2019? Probably not, because a lot can change in 16 months.
The comps your agent looks at should focus on homes that have sold in the last few months. This can get tricky in the slower months, as fewer homes are selling so they may need to extend that window. But if you’re buying during the busy season (ie: summer,) there should be a few good comps to help determine a reasonable value of the home.
Do you have any other questions on real estate comps, or buying a home in general? Reach out to one of our Art of Homeownership Mortgage Professionals and we would love to help you buy your future home!