Determining A Home’s Value – Part 1

What on Earth is a Comp?

When your house is one of your biggest assets, it’s hard to know where you stand financially unless you have some idea of what it is worth. The main problem with that is that, with real estate, you can never really be sure of how much a home is worth until the home gets sold.

Since no reasonable person would sell their house for the sole purpose of figuring out its worth on the open market, the next best thing is to make estimates of the home’s worth using recent comparable open market sales, often called “comps”. This is one of the main methods that professional property appraisers would use to value your house for the purposes of a bank loan or refinancing.

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These two homes, right next door and with the exact same floor plan would be excellent comps for one another.

What is a comparable sale calculation?

Basically it means that to figure out what your house might sell for now, you look at nearby houses that HAVE sold recently. The ideal comparison would be a house next door that is exactly the same size, construction, and condition as your house. In fact, “cookie cutter” type communities tend to be the easiest to value because they were all built around the same time frame, and from a limited number of model designs. But, most people don’t live in those “cookie cutter” communities. So estimates have to be made somehow.

The most basic estimate is to find recent similar home sales, and calculate their price per square foot of living space ($/sqft). You multiply the number of square feet in your living space by the average $/sqft to get a starting value. Then you have to make adjustments to that starting value based on the different amenities or weaknesses the properties (or yours) might have.

What Makes a Good Comp?

  • Recent sales – the more recent the better (values changed so quickly a few years ago that comps got out of date very quickly, and appraisers who didn’t know the area might not realize that)
  • In the same neighborhood – the closer the better (especially if there is a HOA to consider)
  • Built within a few years of the home being valued
  • Similar construction – i.e. Wooden frame vs. Concrete Block
  • Similar style to yours – i.e. ranch style vs two story
  • Close in terms of size – number of bedrooms/bathrooms – a one bedroom home would never be a comp for a 5 bedroom home even if they are next door to one another
  • Similar lot sizes / views
  • Similar amenities (garage, pool, spa, outdoor kitchen, etc.)
  • Same school / taxing area (watch out for county and city limits that can run right through neighborhoods and change the taxes a lot!)
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Even though these are right next door to one another they wouldn’t be good comps:  different build years, construction styles, and VERY different square footage!

Are all of these criteria absolutely necessary for a comp to be included in your set of comps? In short, no. But don’t use that as an excuse to cherry pick comps that have a high $/sqft. You’ll only be fooling yourself!

You also want to remember that your goal is to have your home be most like the “average” of the comps before you go in and make adjustments. If your house is a 3-bedroom house, you don’t want all your comps to have 4 or 5 bedrooms. Instead, think of it as a balancing act where if you include a 4-bedroom house, you should also include a 2-bedroom house in your comps as well. Creating a set of comps can sometimes seem more art than science as you’re bound to have a limited number of recent sales from which you need to choose the a small set that is most similar to yours.

How many comps do you need?

In general, you want to aim for at least two sales, I’ve heard that some professional appraisers aim to have 4 or 5 in every comp set. But quality is far more important than quantity when it comes to comps.

How Do Find Recent Home Sales?

1.) Ask a Realtor. If you know the area, performing your own market comps on your home isn’t too hard, but it does require knowing what homes have sold recently around you. A friendly realtor might be able to give you a list of recent sales, but it’ll be up to you to go through the list and “scrub the comps” (i.e. figure out which ones are “good” based on some of the criteria above.) If you’re not familiar with a street, drive by and see if it qualitatively similar to your house. Does the neighborhood have a similar look and feel? Are the homes around it a similar age as the ones in your neighborhood?

2.) Walk down to the Courthouse. Real Estate sales can be found in the public records at the courthouse; if you’re lucky your county has a way you can access it online so you don’t have to walk down. Another good resource for figuring out what amenities a house has is your local property appraiser’s office. Real Estate taxes are almost always based on a property’s worth, so in Florida every county has a property appraiser, and most of them publish their valuation databases online. In other states, the property appraiser’s office might not be by county, but again, a good realtor will be able to tell you that.

3.) Sign up for ePropertyWatch. A third resource that we use pretty regularly is a website called ePropertyWatch. Once you register your home, they email updates on home sales and foreclosures in the neighborhood. Whenever we get an email from them, we make sure to walk by the house on one of our walks around the neighborhood to check it out.

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