The truth is that a property is only worth whatever someone else is willing to pay for it. We also can't base a house value on active listings because that will only tell us what someone is hoping to get.
That is why you should only use sold comps to determine your house value. Appraisers and real estate agents use comps, among other considerations, to determine the value of property.
What is a comp?
The word comp is short for comparable. This means similar properties that were sold recently within the same area of the subject property, also known as comparable sales.
Distance is important because if the neighborhood feels different, the value is affected. The closer the comp is to the subject property, the more likely the neighborhood will feel the same.
If the subject property is in a densely populated area, it is probably wise to stay within a half mile to pull your comps. The further the distance between neighboring properties, the further you can go to find comparable properties.
In very rural areas, it would be acceptable to go several miles out if necessary to find accurate comps.
What makes a comp accurate?
In order to be considered truly comparable, the comps should also be as close a match as possible to the subject property with regard to age, size, condition and features.
The comps should be no more than 10 years older or newer than the subject property. They should be close in size, so no more than 200 sq ft larger or smaller than the subject property.
They must also have similar features such as number of bedrooms, bathrooms and garage spaces. The number of bathrooms is actually more important than the number of bedrooms. It is not easy or cheap to add a bathroom due to the plumbing and drainage required, but bedrooms are just walls, windows, doors and a closet with a permanent source of heat.
Lot size should be similar as well. A significantly larger lot will add additional value. Other features such as a fireplace, deck or pool can be a consideration, but carry less impact on overall value depending on the buyer’s preferences.
Why is accuracy so important?
If you are planning to sell your property, you want to price it correctly in order to secure a faster sale. You want to maximize your ability to get the most cash out without it languishing on the market for an extended period of time.
Pricing it too low may leave money on the table unnecessarily, while overpricing it may require you to reduce your price over time in order to get it sold. Reducing your price over time and a long number of days on the market may give the impression to prospective buyers that something is wrong with the property. Pricing it right the first time just makes sense.
Of course, you also need to remember to take into consideration the condition of the property when you set the price. As a general rule, comps will be standard sales of houses or properties in average condition or better.
Alternately, if you are buying a property, you want to make sure you make the right offer to the seller. It must be high enough to get your offer accepted, but not so high that you end up paying more than the property is worth.
This is also why lenders will always order an appraisal before they will fund a mortgage and allow you to close on the deal. Knowing these numbers in advance will better prepare you for going through the borrowing and mortgage lending process.
These are the reasons why having an accurate house value is so important.
Why is timing important?
Markets are constantly in motion. These market movements are cyclic. History shows us that market cycles are repetitive and continuously moving up and down, going back and forth between what many in the industry refer to as “buyer’s” markets and “seller’s” markets.
The more recent the sales, the more accurate the comps will be in giving you an estimated value. Appraisers are allowed to go back 180 days to look for comps. Agents will sometimes pull comps going back a full year in order to give the client more information on which to base their research.
But more recent is always more accurate. Using sales comparables within the last 90 days is recommended but not always possible.
This is not an exact science, and there are no guarantees of finding accurate comps for every property at the exact time you need them. But the more sales activity taking place in the area, the easier it will be to find good and accurate comps. For this reason agents and appraisers have a fair amount of leeway on the guidelines for determining value based on comps.