The myth of “Comps”…

One of the most overused, misused and abused terms in real estate is the term “Comps.” The term is generally defined as homes that have sold recently that are comparable (thus the term Comps) to the house being evaluated by the real estate practitioner. Comps are used on both sides of the deal. On the Sellers’ side they are used to help establish the rationale for a market price recommendation. On the Buyer side they are used to help establish or evaluate an offer price.

So, what is the myth part? The myth is found in the word itself and its definition.  Few Realtors® have the time, or take the time, to do the kind of exhaustive analysis of the homes that are chosen for comparisons sake. The Realtor may choose a few recent sales within a reasonable distance from the home being priced, based upon a quick look at some easily evaluated criteria – style, square footage, number of bedrooms and baths and maybe a few more. Most good Realtors do take some time to vet the list to make sure that homes with special value changing criteria, such as waterfront location, are removed.  Then the Realtor may run the remaining comparison homes through a CMA program of some sort to generate averages and statistics. Notice also that the Realtor did not usually visit each house on the list, so he/she really doesn’t know that they are comparable.

Appraisers, on the other hand, may spend hours agonizing over the details and accounting for differences with adjustments to the final value that they use for comparison in rendering their value opinions. Most appraisers also do drive-byes on the Comps, so that they get a feel for the neighborhoods involved and they usually take pictures of the comparable houses.. They may also take the time to look at all of the listing pictures of the Comps, so that they get a better feel for the interior amenities of the homes being used as Comps. Appraisers have to be able to defend each house that they choose to use as a comparable house and the relative values that they assign to it and to the subject house.

I stopped using the term Comps several years ago. I prefer to state to clients that what I am using for my analysis are “similar” homes – similar in size and style and amenities – at least as far as I can tell. I spend some time educating the seller or buyer on the fact that I have usually not been in the other homes, so I really can’t state that they are really comparable. What I can say with some high degree of comfort is that buyers looking for a home within the area of the subject house will likely also visit these houses or did visit them if we are looking at sold homes. I do stay within a reasonable search radius, where the term “reasonable” is relative to the density and sales activity of the area. In some cases a mile radius may suffice, but in some I may have to go out 5 miles. The same is true for the time span for sold homes. In high-density, high-activity areas, 90 days or even less may be all that I need to look at; however, out in the boonies I may have to look out over 6 months, even though the market may be changing in that time frame.

So, instead of Comps, I use a list of 5-8 “similar” homes, within a reasonable area and timeframe. I try to make sure that major factors like the style, square footage, number of bedroom and baths and a few other things are the same or close. Sometimes is it impossible to even get enough similar homes within the same style (ranches can be hard to find), so I try to make sure that the other criteria are very close.  I mainly use this list of similar sold homes for the averages that it allows me to generate. I then spend my time trying to evaluate whether the house that I’m evaluating is above or below that average and by how much. I do that based upon my own visit to the subject house. If it is a house that I might be listing, I do a Franklin Chart of the Pluses and Minuses of the house upon which I’m trying to establish a market value.  I am also usually able to create a to-do list for the homeowner of the things that he can do to improve the market value of the home. Some homeowner care about that and will take action, but many just say “it is what it is” and then I say “and because of that, here is the market value that I recommend and it is what it is, too.”

I usually take the time to educate a would-be seller on the four values that every home has – The assessed value (usually the lowest), the appraised value (higher but still conservative), the Realtor’s Market Value (sometimes called the CMA value and usually higher than the first two) and the insurance value (always the highest “value” for any house).  I try to get them to accept a Market Value for listing purposes that is not too far above what I believe might be the current appraised value. Being a little high is OK, if the market is moving up. On downward trending markets we have a heart-to-heart talk about letting go of “value” that is no longer there. Currently we still talk about when the market will recover all of the value that was lost in the Great Recession.

Many times homeowners have old appraisals, maybe from their last re-fi, and we have to discuss why those are no longer valid. We also have long discussions about why what was good enough for them for all of these years may not be good enough for the market and the potential  impact on market value of not having done any updates or upgrades for the entire time that they owned the home. I point out why Buyers will be discounting their offers on a home with a 25 year old roof, even though it doesn’t leak, yet or for a heating system put in when the house was built in the 1960’s, even if it still works fine for them.  On the buy-side we discuss why they can’t take all of the cost for every project that they see off the asking price. Some things just have to be accepted under the heading of normal maintenance needed.  

So, when getting Comparative Market Analyses on your home as you prepare to sell, take the term “Comps” with a grain of salt. The homes on any list that you are given are probably similar, but there can be major value-changing differences, even if all of the houses are in the same sub. There are choices that people make, while building or as homeowners, such as granite counters or Formica, hardwood floors or carpet, finished basement of unfinished,  crown molding or none, updated or original, new roof or original, new mechanicals or updated, all of which can have dramatic impact on the market price. Two houses with the exact same floor plan can have differences in all of those areas and have values that are tens of thousands of dollars apart. Are they Comps? You decide.

There is value in the work that your Realtor does to arrive at his/her market value recommendations, but don’t cling to the term Comps or get too upset if you happen to be in one of the homes that they used and it is nowhere near as nice as your home. They are just similar. But, do take note of the things that there that perhaps you could do in your home to improve its value. Take heart also that nothing will ever be comparable to the home that you made in your house. It’s just time to love it AND list it. 

About BPOs, CMAs and Appraisals…

Would be home buyers may occasionally hear that the listed price was based upon a BPO. Sometimes, if the property is to be a short-sale the sellers will hear that term, too; as the bank or mortgage company tries to determine a fair market price.  Normal sellers will always hear the term

CMA or Comparative (sometimes Competitive) Market Analysis; and both buyers and sellers will certainly hear the term Appraisal before the deal is done. All of those terms refer to processes done by professionals in an attempt to determine the value of the property. They are all industry terms and all sound better that SWAG (Scientific Wild-Assed Guess), which it also what they all are.

Of the three terms the one with the most science involved is the appraisal, or at least that is what the appraisal industry works hard at portraying. Buried in the fine print of every appraisal is a little sentence or phrase that points out that the work is an opinion about the price.

Like all of these processes, the appraisal involves real data, mainly from past sales of similar homes, and lots of real work as the appraiser tries to adjust the data that he or she has to work with to level the playing field and make the comparison of the “subject property” reflect as close as possible the current value of the house being appraised. There is no intrinsic value to any house and the most honest assessment of value that I’ve ever heard is that any house is worth what someone else is willing to pay for it. Unfortunately, there is also usually a mortgage company involved and so the value becomes whatever the mortgage company says it is worth – thus the need for the appraisal.

So what do the appraisers use to determine a house’s market value? They start with the assumption that the house is worth what others have paid for exactly the same house. Their job is made immensely easier if the house is in a tract sub with lots and lots of recent sales of houses of exactly the same floorplan and amenities. That does happen, but the reality is that no two houses are ever built exactly alike, so the appraisers challenge is to make “adjustments” for the differences.  That’s still fairly easy in big developments; but, what happens when the house being appraised is custom built and off away from other similar houses. That’s where the appraiser starts applying all of his scientific and experience skills to try to create that level playing field, so the houses can be compared as a market.

Appraisers like to work with as little distance involved as possible, so most like to work with similar homes that are within a mile or two, but they will go out further is necessary.  Staying local takes a lot of the neighborhood factors out of the comparison. They also need the homes to be the same in terms of amenities – number of bedrooms (and locations in the floorplan) and baths, style (i.e. single story, multi story, split level, etc.) and age of the build, garage size, basement finish and much more. The appraisers use the term comps or comparable, because they want you to believe that they are looking at a group of houses that are the same (comparable) as the one that you are considering and that it is logical therefore that your house should sell for the same as those examples. It’s a reasonable and logical conclusion to draw.

The appraisal process does have flaws. The appraiser has seldom done more than drive by the comps, so they may not have a good feel for the materials, finishes or conditions inside. They try to make up

for that by looking at all of the MLS pictures that were on line for the comps. So they try to make adjustments for any differences that they note; adding on value or taking off value for those differences. The other flaw is that they are using data from past sales, so the market may have moved on from those sales, sometimes rather rapidly as is has over the last year or so. So they make adjustments for that, too. You start to see why there is that little statement about it being an opinion; a highly informed one of the appraiser is good and has worked hard at it; but an opinion none the less.

Now, BPOs and CMAs are similar processes but done by real estate professionals and dome without nearly as much rigor as an appraiser uses. Banks and mortgage companies hire local real estate professionals to render opinion about the current market value of properties that they are going to put on the market  as short-sales or as foreclosures. Most of the time a Realtor® hired to do a BPO will be required to at least visit the property to assess it’s condition. After that the process is much the same as with the appraisal, but without all of the adjusting efforts.  The Realtor will look for comps, usually within 3-5 miles of the subject property and using sales that are within the last six months within the market area. The agent will use comps that have the same number of bedrooms and baths and other key amenities; but they make no real effort to agonize over the details and make adjustments. They need to get it within a ballpark range for the bank. Because BPOs are ordered and paid for by the lender, they tend to be conservative on the value. They also tend to involve “distressed homes” that may have been damaged or vandalized, many times by the previous owner.

The Realtor that you call to list your house will do a Market Analysis (usually called a CMA) to try to determine what a fair market price will be for the house. He or she will likely find 3-5 similar

homes that have sold within a 3-5 mile radius of your home and 3-5 homes that are similar and are currently on the market.  Realtors tend to be optimistic about the market and forward looking, so they will almost always come up with the highest “value” for your home. They are trying to answers two questions -  what do I think I can get for this house on today’s market and what do I think it will appraise for if I get that price? As a Realtor, I never use the word comps when I present CMA’s that I have done. I’m careful to use the term “similar homes”, because I understand that I have not applied the rigor that an appraiser would to the selection of the homes, nor do I try to make all of the adjustments that an appraiser would. Certainly I take into consideration things like no garage or no basement and style of the house when looking for similar sold or active homes. If necessary I might make a gross adjustment for a major difference, like no garage when all of the similar homes have one.

The bottom line on all of these is that they are the opinion of the preparer, some done with great rigor and some not. The more “cookie-cutter” your house is that more likely they are to be fairly accurate. Things like location (different school districts, for instance, or located on water) or land content (1/2 and acre vs a place with 5-10 acres), and differences in amenities like finished or unfinished basements can make huge differences in the “values” returned by these processes. They are what we have to work with and it is up to you to question how the market value was determined. Like everything lese in life it should make sense to you and if it doesn’t get a second opinion. You’ll note that nowhere in any of these processes do factors like what you need to get or want to get for your house;  or even what your neighbor down the street got last year for his house (unless it is exactly the same as yours). The market doesn’t care what you need. What all of these processes are trying to determine is what someone might pay for it now. Hopefully you’ll be happy with what you can get. Call me or your Realtor to find out more or visit my web site www.themilfordteam.com.