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    405-641-5754

Kay Pratt RE/MAX

Helping home buyers and sellers in central Oklahoma

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Six commonly asked questions about “comps”

Realtors™ are bad about abbreviating long words and assuming the general public knows what we mean. Count me guilty. We use the word “comp” a lot. What is a “comp” and what do we mean when we say this abbreviated word?

“Comp’s” are the average of comparative similar properties to the property in question that have recently sold in the area. A comp is most often used to held determine an accurate value of a property.

In other words, we try to find homes similar to the subject property that have recently sold – usually within the past six months, but sometimes if the property is fairly unique we may look back a year or more to find similar properties. Property such as acreages and small ranches are sometimes quite difficult to find “comps” for, since they are often quite unique and not many comparable properties are sold nearby.

Why are comps necessary?

So why are comps necessary and why do we work so hard to compare one property to another? Isn’t a home worth whatever someone is willing to pay for it?

Well, yes and no. First off, not many people to pay more than a property is worth. And worth is often determined by what people have recently payed for nearby similar homes. Sure some people might be willing to pay more than the comps value a home, but they must REALLY want the home and have the cash to pay for it.

Comps and lending institutions

Lending institutions require an appraisal of the property before lending money on the property. They want to ensure that the home has enough value to cover the loan in case of a default.

The appraiser uses comps – similar homes recently sold in the same area – as an important factor in how they value the property. If the appraisal ends up being lower than the agreed-upon sales price, then the buyer usually has to pay the difference between the appraised value and sales price. Many buyers are unable to do this and most buyers are unwilling to fork over the extra cash required to pay more than appraised value. Not to mention they are then immediately “upside down” in their equity, since the next buyer is probably not willing to pay more than the comps show for the property.

Why do Realtors™ do comps?

As a real estate professional, buyers and sellers hire me for my expertise in the marketplace. If you are planning to sell your home, it is important for me to provide you with realistic comps so that you have a good idea of value the appraiser will give your home. If a home is priced too high, in nearly all cases IT WILL NOT SELL! Buyers are smart and have a lot of information at their fingertips, and they typically have a lot of properties they can choose from when searching for a home. I rarely see buyers willing or even able to pay more than appraised value for a property.

On the other hand, if you are a buyer it is important that I provide you with information you can use to make an offer on a home. Even if you find your “dream home”, you will want to make a realistic offer at or below the appraised value, especially if you will be financing the purchase. Nobody wants to write a contract, negotiate a purchase price, and make plans to move, only to discover two weeks before closing that the home won’t appraise for the agreed-upon sales price. It is a rude surprise to get your hopes all set for a home, only to find that the bank won’t lend you the money you thought you were going to get, and you have to come up with a sometimes significant amount of extra cash to put down on the home.

Some homes are unique and can easily sell for more than the appraised value, but that is the exception rather than the rule.

Is a Zillow Z-Estimate the same as a comp?

Not even close. Zillow Z-estimates are computer-calculated guesses of what a home is worth, but in my experience, these estimates are nearly always wildly incorrect, both low and high. The Z-Estimate doesn’t take into account the condition of the property, any upgrades, the curb-appeal, or even the desirability of a neighborhood. In my opinion Z-estimates are pretty well worthless, since they can and are up to 20% off, both higher and lower than homes often sell for.

Are county assessor values the same as a comp?

While county assessor values are usually a bit closer to true value than Z-Estimates – primarily because a human does the assessment – these are still estimates. The assessor doesn’t actually walk into homes to do an assessment, so they have no way of knowing the condition of a property. They can sometimes see outbuildings added to the property and will give additional value for those, but again they have now way of knowing if that garage you added has living quarters or is just a place to store the car you are rebuilding.

It is much easier to come up with accurate comps in a densely-populated neighborhood with similar homes. It is much more difficult to come up with comps in sparsely populated areas with unique properties.

My house is unique. How do you come up with a comp?

It is not always easy and it is not an exact science. Good comps come from experience – experience at buying and selling a lot of homes in a marketplace over time. In most cases I try to find homes that are similar to the subject property, and then make adjustments to the value based on the condition of the home, any upgrades such as remodeled kitchen or a swimming pool, and even adjustments based on curb-appeal and location. An identical home that backs up to a busy highway is not as “sellable” as the exact same home in the same neighborhood on a cul-de-sac.

Summary

Comps are critical to the home buying and selling process. Appraisals – the formal process used by lending institutions to value a home – are critical in setting the value of a home. If you home is priced over appraised value it becomes very, very difficult to sell because it is hard to find buyers who are willing to pay more than appraised value, and to find buyers with the extra cash to pay the difference between appraised value and sales price.

But appraisals are not the final word on the sales price of the home. It still comes down to whatever a qualified buyer is willing to pay for a property. Occasionally I have seen buyers pay more than appraised value for a property, but it is an extremely rare occurrence and it almost invariably because the property is very unique and has features or a location the buyer finds highly desirable.

Posted in: Ask Kay Tagged: appraisal

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405-641-5754 Direct

kay@kaypratt.com

RE/MAX At Home
3224 South Broadway Suite 225
Edmond, OK 73013
Office: 405-708-6691

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