What Are Comparables?
Comparables (comps) are used in valuations where a recently sold asset is used to determine the value of a similar asset.
Comparables, often used in real estate to find the fair value of a home, are a list of recent asset sales that reflect the characteristics of the asset an owner is looking to sell. However, the list of sales is generally limited to within the last year.
- Comparables assist in finding the correct asking price for the property.
- Agents and sellers both have access to gathering comparable data.
- MLS software can be used to find an accurate comparable similar to the home being evaluated.
- An FSBO has the ability to find the best comparables in the area to assist the realtor when that time comes.
- Comps are not limited to selling and buying a home. It can be considered for refinancing the home.
The use of comparables involves comparing the characteristics of a recently sold asset with the characteristics of a similar asset that is being valued. This can help to determine the value of the asset based on its similarities to the recently sold asset or set of assets. The value of the comparable asset is then used as a benchmark or reference point for valuing the similar asset.
When using comparables, it is important to compare assets that are as similar as possible in terms of their characteristics, such as location, size, age, condition, and other relevant factors. The more similar the assets are, the more reliable the resulting valuation will be.
Using comparables for valuation is helpful for accurately appraising any asset. For example, a real estate agent may appraise the value of a home-based on the most recent selling price of a house in the same neighborhood with similar attributes, such as square footage and the number of bedrooms and bathrooms.
A minimum of three comparables must be reported in the sales comparison approach.
Who Uses Comparables?
Comparables are used by a wide variety of individuals and organizations, including investors, financial analysts, and appraisers. They are commonly used in the real estate and securities industries to help determine the value of a particular property or investment. Comparables are also commonly used by individuals who are looking to buy or sell a home or other property, as they can provide valuable information about market conditions and prices in a particular area.
Comparables are frequently used by home seekers, appraisers, and real estate agents. The agents and appraisers use comparable homes that are located within about a one-mile radius from the property they are evaluating. The comparable that is being used is typically sold no longer than a year ago to date. It is normal to attempt to use around three comparables to accurately get the appropriate asking price.
Securities analysts and investors often use comparables to help determine the value of a particular security, such as a stock, bond, or derivative - especially when it lacks an active and liquid market. For example, they may compare the characteristics of a recently sold derivatives contract with the characteristics of the one that they are trying to value. This can help them determine a reasonable price for the security based on how it compares to the recently sold contracts.
How to Find Comparables
To find comparable properties, also known as "comps", you can start by looking at properties in the same area that are similar in size, age, and features. You can look particularly for homes that meet these criteria that have recently sold or which are listed for sale. The Realtor's MLS system is also useful for identifying homes for sale or which have recently sold.
In addition, you can contact a local real estate agent or look at recent sales data from the county assessor's office. Real estate agents have access to a wide range of information about properties in the area and can help you identify comparable properties. The county assessor's office, on the other hand, keeps records of recent sales and can provide you with information about the prices that similar properties have sold for in the past. Both of these resources can be valuable when trying to find comps for a property.
You can also use online real estate websites, such as Zillow or Redfin, to search for comps. These websites often have tools that allow you to filter your search by location, price, and other factors. Once you have a list of potential comps, you can compare them to the property in question to determine its value.
In general terms, comparables are typically limited to properties that have been sold within the last year. This is because market conditions can change rapidly, and using comparables that are too old can result in an inaccurate valuation. However, in some cases, older comparables may be used if they are deemed to be still relevant and representative of current market conditions.
Searching for Comparables: Areas to Focus on
The best practice to use comps is during a for sale by owner (FSBO) situation. Realtors have more tools and resources to accurately evaluate the price of the home. An FSBO is perfect for sellers who are not using a realtor. The seller is able to gather data from the nearby neighborhoods on comparable homes, and then proceed to list the home price accurately.
When looking for comps, some of the characteristics you should consider include the property's location, size, age, and condition. You should try to find properties that are in the same general area as the property you are trying to value, as location is one of the most important factors in determining a property's value. Additionally, you should look for properties that have similar features, such as the number of bedrooms and bathrooms, type of heating and cooling system, and any special features, such as a pool or deck. By comparing properties with similar characteristics, you can get a more accurate estimate of the property's value.
These criteria can easily be searched for on one of the listing websites, but more data can be gathered by looking at multiple. The more information that is gathered, the more accurate the comparable home price will be. It will pay off to do all the research possible.
Because every home is unique, even the best comparables may not be exact. Therefore, you may benefit from visiting homes in person and drive by to see it with your own eyes (or viewing them on Google Maps Street View). Also make sure to compare the type of home - a 3 bedroom, 2 bathroom home with 1,500 square feet can be a private home, a townhouse, a condo, or an apartment in a high rise. If you look only at the technical criteria, simple facts like this may be overlooked, which can result in bad comps.
Example of Comparables
For example, Bert wants to sell his house. He notices that a similar house in the neighborhood has just recently sold. He does a little investigating and finds the price that it was sold for. He now has an idea of how much his property is worth.
He enlists the help of Steve who is a realtor. After taking a walk-through of the house, Steve pulls comparables for the last 12 months for houses similar to Bert's in his neighborhood. These comparables are used to determine the list price for Bert's house.
What Are Bad Comparables in Real Estate?
Using bad comparables in real estate can result in an inaccurate valuation of the property. Some examples of bad comparables in real estate include:
- Properties that are significantly different in size or location from the property being valued. For example, if you are trying to value a small apartment in a central location, comparing it to a large suburban house would not be a good idea.
- Properties that are in different condition or have been significantly renovated. For example, if you are trying to value a property that has been well-maintained, comparing it to a property that is in poor condition would not be a good idea.
- Properties that are not currently on the market or have not recently been sold. Using outdated or irrelevant comparables can result in a valuation that is not representative of the current market conditions.
- Properties that are not representative of the local market. For example, if you are trying to value a property in a neighborhood with a high demand for housing, comparing it to a property in a declining area would not be a good idea.
What Is Trading Comparables in Business?
In business, trading comparables refer to a method of valuing a company by comparing it to similar companies that have recently been sold or are currently on the market. This method is often used in the field of mergers and acquisitions to determine the fair market value of a company.
What Are Banking Comparables?
Banking comparables refer to a method of evaluating the performance of a bank by comparing it to similar banks. This method is often used by investors and analysts to assess the financial health and stability of a bank. By comparing a bank to other banks in the same industry, it is possible to identify trends and patterns in the bank's financial performance, and to determine how well the bank is doing in relation to its peers.
The Bottom Line
The use of comparables ("comps") in valuations involves comparing the characteristics of a recently sold asset with the characteristics of a similar asset that is being valued. This can help to determine the value of the asset based on its similarities to the recently sold asset or set of assets. The value of the comparable asset is then used as a benchmark or reference point for valuing the similar asset. Comparables are commonly used in the real estate and securities industries to help determine the value of a property or investment. Comparables may also be used to value private businesses.