What Are Comparables?
Comparables, or comps, are used to establish a reasonable price for an asset based on the prices recorded recently for similar assets.
Comparables are important to pricing decisions in many industries but are essential in real estate. They are an important factor in determining the fair value of a home based on prices achieved for homes of similar size, condition, and amenities in the same neighborhood.
Most lists of comparables are drawn from sales in the previous year.
Key Takeaways
- Comparables are used in many businesses as part of the process of determining a fair price for an asset.
- Real estate pricing is highly dependent on comparables.
- If you’re considering buying, selling, or refinancing a home, checking the comparables is a must.
- Recent sales information is easily accessible on the web, and a drive-by can add more information to consider.
Understanding Comparables
Using comparables requires comparing the characteristics of a recently sold asset with the characteristics of a similar asset that is being valued. When using comparables, it is important to compare assets that are as similar as possible in their characteristics, such as location, size, age, condition, and other relevant factors. The more similar the assets are, the more reliable the resulting valuation will be.
When done properly, attention is paid to details that add or detract from the value of similar properties, such as distance from good public schools or a particularly attractive patio.
The value of the comparable asset is then used as a benchmark or reference point for valuing the similar asset.
A minimum of three comparables must be considered in the sales comparison approach.
Who Uses Comparables?
Comparables are used by investors, financial analysts, and appraisers in many businesses.
Stock analysts and investors use them to help determine the value of a company’s shares based on the prices of its competitors in the same industry. They may be used to identify companies that are significantly undervalued or overvalued in comparison to their peers.
Comparables are commonly used in commercial real estate to determine the profit likely to be realized by renting or selling space.
They also are a valuable resource for introducing any new product to the marketplace. A new product must be competitive in price with similar existing products. If it’s higher in price, the premium must be justified by its superior qualities.
How to Find Comparables
When considering the price of a home, start by looking at recent sales nearby that are similar in size, age, and features. Current listings are also of interest.
Realtor.com lists recent home sales in a database that is searchable by zip code. The images, descriptions, and property details are viewable in the result.
Other resources include local real estate agents and the county assessor’s office. Real estate agents have access to a wide range of information about properties sold and for sale in the area and can help you identify comparable properties. The county assessor’s office keeps records of recent sales and can provide you with information about the prices that similar properties have sold for in the past.
Online real estate websites such as Zillow and Redfin also can be searched for comps. Some have tools that allow you to filter your search by location, price, and other factors.
Once you have a list of potential comps, you can compare them to the property in question to determine its value.
In any business, comps are usually limited to sales over the previous year. Market conditions can change rapidly, and comparables that are older can be misleading.
Searching for Comparables: Areas to Focus on
Comparables are a must if you’re considering a for sale by owner (FSBO). Realtors have the resources and expertise to accurately judge the value of a home. Comparables can help sellers who avoid hiring a realtor to start the process with a reasonable price.
When looking at comps, consider listings that are most similar to your property’s location, size, age, and condition. Location is always important. Look for properties that have similar characteristics such as the number of bedrooms and bathrooms, type of heating and cooling system, and special features such as a pool or a deck. Look for extras and upgrades that add value to the property. By comparing properties with similar characteristics, you can get a more accurate estimate of the property’s value.
The more comparables you look at, the more accurate your home’s asking price will be.
Other Tips
Even the best comparables can’t tell you everything. You can get a more precise assessment by driving past the home or viewing it on Google Maps Street View.
That will give you plenty of information about the attractiveness of the street, the walkability of the neighborhood, and its proximity to amenities that are important to you. You might also discover big negatives, like a gas station next to the house.
Example of Comparables
For example, Bert wants to sell his house. He notices that a similar house in the neighborhood has just recently sold. He does a little investigating and finds the price that it was sold for. He now has an idea of how much his property is worth.
He enlists the help of Steve, who is a realtor. After taking a walk-through of the house, Steve pulls comparables for the last 12 months for houses similar to Bert’s in his neighborhood. These comparables are used to determine the list price for Bert’s house.
What Are Bad Comparables in Real Estate?
Bad comparables lead to big errors in pricing real estate. Avoid basing your price on the following:
- Properties that are significantly different in size or location from the property being valued. If you are trying to value a small apartment in a central location, the value of a large suburban home is meaningless.
- Properties that are in very different condition. If your home is well-maintained with good but not spectacular finishes, don’t look at homes that need work or have recently installed high-end appliances.
- Properties that were sold more than a year ago. The real estate market moves fast.
- Properties in significantly different locations. If your home is in a hot neighborhood, comparing the prices of homes in a declining area isn’t helpful.
What Is Trading Comparables in Business?
Trading comparables is a method of valuing a company by comparing it to similar companies that have recently been sold or are currently on the market. This method is often used in the field of mergers and acquisitions to determine the fair market value of a company.
What Are Banking Comparables?
Banking comparables is a method of evaluating the financial performance of a bank by comparing it to similar banks. This method is often used by investors and analysts to assess a bank’s financial health and stability. The comparison helps identify trends and patterns in the bank’s performance, and determine how well it is doing in relation to its peers.
The Bottom Line
The use of comparables helps to put an accurate price tag on an asset, whether it is a home for sale or a company’s stock. It involves finding the closest possible matches to the asset being valued and adjusting for variables that make it more or less valuable than its peers.
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