Simply stated, a sale is a property that has sold. A comparable, commonly referred to as a “comp”, is a recent sale that a reasonable buyer would consider as a good substitute for the subject property. Not all sales can be considered comps! A house that sold down the street doesn’t automatically get designated as a comp. That house could be a 3,500 square foot home on 2 acres with a pool, and it just doesn’t serve as a comparable substitute for the buyer’s 1,250 square foot house. (Also, very important to remember when using price per square foot as a guide.)
The comp selection process involves identifying properties that most closely align with the subject property. There is a small bit of discretion used, but a good comp should mark off the following four items:
- Location – A comparable will IDEALLY be located as close to the subject property as possible. For complex properties, however, comparables can be miles away from the subject property.
- Recency – Timing of the sale is important. It is preferred to use very recent sales. This is especially important in a changing market environment. There are situations where the best comparable sold is further in the past. Time adjustments, if supported, can be used if necessary for the older sales.
- Quality/Condition/Features – Comps are typically very similar in overall quality and condition as the subject property. The quality of finishes for each home is evaluated and aligned as closely as possible. If the subject property has high end finishes, comparables should be selected with similar high-end attributes. Likewise, a home renovated from the floors to the ceilings would not serve as a good comparable for a home with only new interior paint.
- Living Square Footage – All else equal, the best comparables will have a very similar living area as the subject. Accurate measurements of the subject property are very important so that the best sales can be selected as comparables. This accuracy is especially important when pricing a house using sales data.
Of course, it is easier to identify good comps for some properties than it is for others. The number of good comparables can be limited for complex properties. In these situations, it is often necessary for the appraiser to make adjustments for the varying property features.