14 Tips for Running Single Family Residence Sale Comparables
Running comps is an art, not a science. Five intelligent, capable real estate professionals (including appraisers) can run a comp report and come up with five different variations of which properties to include and different opinions as to the importance of each variable.
Why does this happen? Because part of determining whether a property is “comparable” to the subject property is subjective, up to the interpretation of the person running the report. Out of the thousands of possible things one could look at, it is up to each person running the report to give the factors they see as important a certain weight and leave less important details out. How the factors are weighted and prioritized ultimately influences whether or not a given comp is comparable enough to be included in a report. It’s common to run a search with strict criteria in an effort to have high quality data, but it can result in an inadequate comp set. When this happens, adjustments should be made to the search criteria, starting with the most important, until the comp report is acceptable.
While there are many factors that could be considered, there is a set of criteria that is generally agreed upon to be the most important. Here are our top tips for running a sale comp report and making sure you end up with high quality data from which you can make informed decisions.
Find a Balance Between the Time Taken and Getting the Results You Need
The 80/20 rule and the law of diminishing returns apply to running comps reports. One could spend weeks tracking down every detail for every somewhat comparable property that sold within the past year. However, it’s best to start your search with defining what criteria matters most and assigning tight ranges (low variance from the subject,) knowing that if that criteria produces an adequate number of comps you will have a high-quality report.
Know in advance which search criteria you will adjust when attempting to increase the number of comps in the comp set, and make the adjustments one at a time. If several adjustments are made between each search, you might get too many results and have to back-track to determine which are the highest quality.
Coming up with criteria—both initial criteria and adjustments–in advance helps guide decisions around when you should opt for fewer, but higher quality comps vs. a greater quantity of lower quality.
It’s important to remember that it’s impossible to find a property that is exactly comparable, and that is not the goal. The goal is to get a set of comps that provide not just data points about similar properties, but enough data points to get you moving away from anomalies and as close as possible to information with statistical significance. You’re trying to get close enough—separate the signal from the noise, if you will.
Specifying Your Sale Comp Criteria
Many decisions around what specific criteria should be used are based on area characteristics, and as such, are not covered in this article. For example: in some areas, there is enough transaction volume to look for comps that are less than 60 days old, whereas other areas have much lower transaction volume and should use 120 days. Other examples include distances, variances in physical property characteristics, and what subjective factors are important to the market.
As you gain familiarity with the local market, making these determinations becomes easier and more intuitive. Regardless of your experience, having discussions with other local professionals—ideally those involved in the comp transactions—can help you clarify what information about the market, comp property, and even subject property is important and worth considering in the comp set.
Most Common Search Criteria for Your Sale Comps
As mentioned earlier, running sale comps is an art, not a science, because not all criteria is objective and universally quantifiable. Your search criteria will likely include both objective factors (definitive facts) and subjective factors (characteristics that impact desirability).
The most common objective factors include:
- Sale price or expected sale price (if pending sale)
- Time since closing (number of days old)
- Days on market (DOM)
- Days in contract (if pending sale)
- Distance to the subject property
- Other relevant location boundaries, including block, zip code, city, county, etc.
- Property type (house, townhouse, condominium, co-op)
- Square footage
- Lot size
- Number of beds and baths
- Year built and year renovated, if applicable, as well as scope of renovation
- Architectural style (e.g. contemporary, victorian, craftsman, eichler)
The most common subjective factors include:
- Condition of the property as a whole or a breakdown of kitchen, baths, bedrooms, etc.
- Desirability of the location (block and neighborhood appeal)
- Curb appeal
- School district
- Proximity to places of positive potential interest, including transportation hubs and infrastructure, shopping areas, restaurants, and service providers.
- Proximity to places of negative potential interest, including industrial zoning or uses, high-traffic areas, noisy public transportation, cemeteries, strip clubs, homeless shelters, rehab centers, abandoned/unkempt homes, and construction sites.
- Proximity to places of varying potential interest (either positive or negative, depending on the quality of the place and the preferences of the end-buyer), including schools, religious venues, parks, government buildings, shopping centers, and central business districts.
Our Top Tips for Running A Sale Comps Report
When starting a search, a few inputs of criteria may be enough. The rest can be layered in if and when needed to refine the results.
Take unit-level metrics into consideration, in addition to sale price. Look at price, price per foot, price per foot of land, etc. Surprising things can arise based on these figures, that would not be obvious by looking at only one.
Pay attention to nearby retailers, especially well-known brand names that have moved in recently. The site selection committees behind big brands are smart. Before signing a 10-15 year lease with options, they do their homework about whether their brand is a good fit for the demographic within a 1-3-5, and sometimes 10/15 mile radius (depends on the retail use and competition from similar uses in the sub-market).
Search for the property’s “walk score” and pay attention to the quality of the local establishments, not just the proximity. A high, seemingly positive, “walk score” can be misleading if the adjacent goods/service providers are undesirable or inadequate to serve the end-buyer’s needs.
Find out if the transactions included any unique sale conditions that might have impacted pricing. Unique sale conditions include: seller distress (financial or non-financial situations like illness, death, divorce, etc.), all-cash vs. financed purchase, short contract period/early non-refundable deposits/short due diligence periods vs. standard timeframes, creative terms, joint ventures, favorable long-term lease-backs, etc.
Remember: a closed sale comp is usually far more reliable than a pending sale. Caveat: if you have intel about the pending comp that a significant portion of the prospective buyer’s deposit is non-refundable and you trust your source of information about the transaction, it becomes closer to the value of a sold comp, all else equal.
Use logic and your judgment when thinking about the likely market for each property and its impact on value. Think about each comparable property from the perspective of the buyer universe. Small differences on paper, like going from a two-bedroom house to a three-bedroom house, may have a significant impact. In this case, a three-bedroom house may (and usually does) have a much wider appeal to the pool of buyers than a two-bedroom house. This is based on demographic trends, affordability, and the future plans or goals of home-buyers. A wider audience means more demand, and higher pricing, than a two-bedroom house with similar characteristics.
Drive the market. Interesting insights can come up when driving a market. One of the primary benefits of driving a local market is stumbling on for-sale signs, or sold signs, for properties that didn’t show up in your search and that might be great comps. For getting a feel for the neighborhood, Google Drive By is a decent substitute, but make sure to verify the dates of the drive by so you can verify that the information is at least somewhat current. Take advantage of images in a listing, Google Street View, or recent images found on the web.
Take advantage of images in listings and on the web. Images of a property’s interior and exterior can provide valuable information around quality of finishes, functional obsolescence, and other qualitative concerns. Make sure that any images you rely on are current (not from a prior listing that may not reflect the property at the time it was sold).
Make adjustments like an appraiser. Appraisers note the variances between comps and a subject property and attempt to assign a monetary impact on the comparable property’s value. For example: if a subject property has a pool and a comparable property does not, the appraiser will attempt to determine the value of that pool based on other market transactions, and adjust the comparable properties value in order to make the two properties more comparable.
When reviewing the results of your comp report, look at ranges (highest and lowest values) for applicable criteria as well as averages. Give more weight to the comps (and corresponding high, low and average figures) that you deem to be high quality.
Pay attention to site differences. When it comes to lots, size is not all that matters. Some sites are mostly comprised of flat, buildable land which provides opportunities for future added value (additions or re-development with more square footage), while others have only a small portion that is buildable despite a large area. Keep the concept of “highest and best use” in mind. Specifically, consider what someone could build if their goal were to create maximum value with what the current zoning allows.
Keep detailed notes about each property and transaction in a “notes” field. When doing research, including calling the agents/brokers involved, drive-by’s, talking to neighbors, and searching the web, you will likely come across a lot of data that may or may not end up being relevant. It’s best to keep detailed notes of your research findings and wait to filter/refine notes until you’re certain you know what is useful. It’s always easier to remove information than to try to re-obtain it, especially when looking at multiple sources.
Run a general web search using the property address. It’s often worth scanning the first one or two pages of search results to see what comes up. You never know what you’ll find. You might discover a property has an undesirable history that was previously unknown, or other points of interest that may impact the properties desirability.
While this is somewhat of an exhaustive list of tips and considerations, many of these become second nature after a few times through the determine criteria-search-refine loop that is running a comps report.