Traditionally, homeowners have had to rely on real estate agents and realtors for assistance when valuing a home to sell it. Realtors have access to certain databases that allow them to carry out comparables, and come up with a valuation.
Now, with the majority of Americans having access to the net, comparing one’s property has never been easier. Comps let homeowners look at how much other similar houses to theirs sold for. By comparing similar homes in an area, a homeowner can get an idea of how much their house is worth, and what it might sell for.
Comparables also indicate how long houses take to sell, and whether the price needs to be lowered. Knowing how to comp your property is useful during times of refinancing, or investing too. This short article attempts to explain a little about the benefits of comparables, and how you might use the process for your property.
What do comps in real estate mean?
Comparables simply mean weighing up similar properties in the same area to establish an average price. By taking a small selection of homes that have been sold in recent months within a set radius, you can work out a valuation for your property.
For accurate comparables, homes must be similar. There is no point in trying to compare an apartment to a farmhouse for instance. The square footage, amount of bedrooms, and style of the home must all be comparable.
But, you can take a distressed house and compare it to recent sales if you are planning to renovate it. There are reasons why renovation is necessary for house sales, and fixing and flipping is a common route to real estate investment now. Comps could be used to give an idea of how much a home will be worth after renovating it.
When do you need an accurate house valuation?
Many homeowners need to refinance at some point during the mortgage’s term. There are a few ways to get equity out of a home including cash-out refinancing or HELOC which gives a line of credit against the property’s equity.
Understanding the value of a home can help when making refinancing decisions. Comparing your property will give you an idea of how much your home is worth now, and looking at historical sales might indicate where your property’s value is heading.
Other times when comparables are useful include the following:
- Fixing and flipping
- Investing in property
- Buying a home
- Selling a home
- Borrowing against a property
Sometimes people carry out comparables simply out of curiosity to see how much their home is worth. It’s not unusual for homeowners to go online and look at neighbors’ house sales to see the price. But, comparables are genuinely useful when seeking hard money loans to finish a project, or when looking to buy a home to fix and flip.
Hard money is one of a few useful loan options for house flippers and real estate investors. Yet, hard money loans are leveraged against properties so comparables are needed to get a picture of how much a home might be worth after it has been fixed up.
How do you compare properties?
Firstly, you will need some properties to comp. Three properties plus yours is a good number for comparing against.
Real estate agents use the MLS for comps, but unless you are a licensed realtor, you won’t be able to get access. Never mind, because real estate listings are freely available on the net.
Search through sales listings online until you find three or more homes in your area that have recently been sold, and are similar to your house.
The houses you choose don’t need to be facsimiles of yours, but they need to be comparable. A slight increase or decrease in square footage won’t matter too much, but comparables are easier when properties are closely matched.
The market prices of these properties will give you an indication then of how much your home might be worth.
Are comparables accurate?
This article is too brief to get into a thorough explanation of comparables. And when comps are carried out properly there are calculations to be made to adjust differences in age, square footage, and the time of sale.
However, comparables are a vital part of real estate investment and sales. For anyone involved in a flipping project, comparables are necessary to avoid errors when renovating and budgeting.
Buyers can use comparables to get a fair market valuation, and real estate brokers always use comps before marketing homes. However, comparables aren’t entirely fail-proof.
Properties used in comps use the sales price as listed, but things may have gone awry before completion. Choosing homes that sold quickly is one of the best ways to comp properties. Fast sales indicate that sellers were happy with the offer they received.
Summary
Comparing properties helps buyers, sellers, and brokers alike. But, comps are also important when refinancing against a home’s value, or looking to invest in real estate.
Anyone wishing to get into fixing and flipping should take time to understand comparables. Unless the potential sales price is understood, there will be no way to estimate the ROI on any investment.
The MLS provides a more accurate picture for comparables, but anyone can comp their property as long as they have internet access.
