Identifying Good Comparables

Intended Readers: Real estate appraisers, investors, brokers, homebuyers, and anyone else needing to understand real estate valuation.

Many of my clients and associates are appraisers and other real estate professionals; determining the market value of real estate is a critical component to them.

For residential real estate especially, the most common way to determine value is to compare a property against other properties that are similar and have recently sold. These similar sales are called sales comparables, or comps for short.

Most of you reading this already know the basics for good comparables, but I’ll start from the beginning. A good comparable is geographically close to the subject property, was sold recently, has similar taxation characteristics such as the same school district, and has similar attributes such as style, building and lot size, as well as actual and effective age. For an explanation of actual and effective age, click here.

A typical (if not too ideal) search for sales comparables in a residential area of Nassau County, Long Island would consist of:

• 1 mile radius or less from the subject property.
• Sold within the past 6 months.
• Same school district as the subject.
• Building square footage (or gross living area) within 10% of the subject's square footage.
• Similar number of rooms/baths.
• Same architectural style as the subject.

Of course, no two properties are identical. This is why appraisers and other valuation experts use adjustments, which essentially allows them to compare apples to oranges – actually let’s say Fiji apples to McIntosh apples.

In addition to similarities, timeliness and physical characteristics, the circumstances of the sales need to be taken into consideration. Market value is determined by using arms length transactions, or a sale between two unrelated parties with no conflicts of interest sold under typical market conditions.

Examples of arms length transactions are a real estate agent selling a property to a buyer who attended an open house, or homeowner who sold his/her property by listing it in the local newspaper. Example of non-arms length transactions are sales between family members, foreclosures, and flipped properties.

You can weed out a lot of these non-arms length transactions with a little due diligence. Look at the names of the parties involved in a transaction; if the last names are the same it’s likely a family transfer.

If a property was sold more than once in a relatively short period of time, it may have been flipped. Not all flips are bad, but flips have often been used to artificially inflate property values or to conceal ownership.

Other sales to watch out for are those that occur shortly after a bank files a lis pendens on the property. A lis pendens is usually a notification to the public from a bank that a borrower is in default of their mortgage loan. Properties sold in the wake of a lis pendens may be due to a short sale, foreclosure auction, or an REO sale. Any of those circumstances are viewed differently than a typical market sale.

Whether you’re an appraiser, investor, homebuyer, homeowner or real estate agent, knowing this and utilizing it to make sound real estate decisions can greatly affect your success in real estate. Many areas have online data providers that have some or all of this information for a few hundred dollars a year. If you’re in the business or just looking to purchase a property, such an investment can pay off with huge dividends.

Shameless plug: GeoData Plus is a real estate provider for New York, and they have a great comparable search tool. They even highlight sales that are potential flips and foreclosures.