In real estate, a comp is an abbreviation of the phrase "comparable sale." Generally speaking, a comp is a recently sold property in the same area with similar characteristics to your home or a home you're looking to buy.
The keyword here is "recently." The main purpose of using house comps is to determine what a particular house might sell for in today's real estate market. By using homes that have sold within the past few months, you can get an accurate idea of how much buyers are willing to pay for homes in your market.
A comp doesn't necessarily need to be the same as your house in every way. Comps can have significantly different square footage and lot sizes, and can even be in very different condition than your house. The most important things are the proximity to the house you're thinking of buying or selling and the time that's passed since it's sold.
Why house comps matter to you
Whether you're in the process of buying or selling a home, it's important to understand house comps and what they're used for. With that in mind, here's a rundown of why comps matter to buyers and sellers of real estate.
Why house comps matter to buyers
There are a couple of main reasons why house comps matter when you're buying a home. For one thing, looking at comps can help you determine a fair offer. Here's a simplified example. Let's say you want to make an offer on a home and two similar homes in the same neighborhood recently sold for $200,000 and $205,000. You may want to make an offer that's slightly less than these with the expectation that you'll end up paying something in this range.
House comps also matter in the buying process when it comes to financing. When you apply for a mortgage, your lender will typically order an appraisal before approving your loan. The reason is that lenders want to protect themselves -- they aren't willing to make a loan if you're overpaying for a home. If things go badly and you stop making payments, the bank gets stuck with the house.
Appraisers use a few methods when it comes to determining the value of your home, but a major component involves analyzing comps in the area. When I recently had an appraisal done on a rental property, the appraiser used three comparable sales in the same neighborhood as a basis for calculating its value.
Why house comps matter to sellers
Every real estate agent I've ever spoken with has told me one of the biggest issues they run into with home sellers is unrealistic expectations of what a home will sell for. To be fair, it's difficult to make a rational assessment of the value of something you have an emotional attachment to.
Using comps can help you get a realistic idea of what your house will sell for. If you're working with an agent, they'll likely pull some recent comps and suggest a listing price. This is known as comparative market analysis, or CMA. If you're selling your home on your own, or you haven't started the selling process, look at a few comps on your own. They can help you determine what you can expect to get for your home before you list it on the market.
It's tough to overstate the importance of coming up with a realistic price for your home. Pricing your home according to the comps in the area as opposed to what you think you "should" get for it can make the difference between a quick sale and your house sitting on the market for several months or longer.
How to find house comps
There are a few ways you can find comps. Perhaps the best source for comps is a local real estate agent. These professionals are used to using the local multiple listing service (MLS) to find comps. They can make adjustments based on your home's condition, square footage, and other factors. Plus, if you ask a real estate agent to put together a list of comps for you, it can save you lots of time.
Real estate websites such as Zillow can also be a great source for comps, although this can be a bit trickier to navigate on your own. You can filter homes in your area that have recently sold and choose two or three that are comparable in condition and size. Realtor.com and Redfin are also good places to look.
Your local property records (if they're available online) can also be a good source for finding comps.
A few notes when looking at comps:
- Make sure the property sold within the last few months. Zillow, for example, may categorize a home as "recently sold" for much longer. Your local real estate market may have significantly cooled off or heated up since these sales took place.
- Try to compare homes with the same number of bedrooms and bathrooms. This actually tends to be more important than square footage. The best bet is to compare a three-bedroom home with another three-bedroom home and then make adjustments for the square footage.
- Of course, ideal comps will be the same age as your home, have the same lot size, and be in the same condition. Unfortunately, a perfect comp doesn't always exist -- and that's okay. Finding homes that sold recently and close to your home is the most important thing. Then you can adjust for other differences accordingly.
- Don't use homes that are on the market but haven't sold yet. There's no way to know how much they'll sell for -- or if they'll sell at all. Some homes sell for more than the asking price, while others end up selling for much less.
- Keep in mind that comps aren't a 100% accurate way to determine your home's value, even if a comp is essentially a perfect match to your home. Although you can see how much the home sold for, you don't know the other circumstances surrounding the sale. For example, if a seller agrees to pay the buyer's closing costs, the listed sale price would be significantly higher than the price the seller actually received for the home. Or maybe one of the real estate agents in the transaction agreed to take a lower commission to help the sale go through. The point is that comps are a good way to determine the fair market value of a home, but not a perfect one.
The bottom line on house comps
House comps are a key component of both buying and selling real estate. They can prevent you from overpaying for a property you're buying and help you determine a realistic listing and sale price for a home you're selling. When looking for comps, make sure you do enough research to find ones that are as accurate and as similar to your home as possible.