Why Asking Price Is In The Comparable Sales

Posted on January 30, 2015 by

Ask any Realtor how he or she prices houses, and you will hear a version of the following statement: “Well, I look at the comparable sales and then I …”

The same answer would include potential buyers, lenders, brokers and even appraisers. The data within REIAComps has consistently shown investors how to determine both solid acquisition value and after repair value for residential real estate.

Now, in the defense of Realtors, using comparable sales (“comps”) to price listings is what they were taught. Find the (3)“closest”comparable sales, make some adjustments for the differing features and use this analysis to arrive at an asking price for the home.

Truly, Appraisers typically use the same technique, as do most county assessor offices. Free broker and agent lead generation web sites like Trulia and Zillow apply similar inputs to their valuation algorithms. The comparable sales method has been in use for the measure of my career, and I am approaching 20 years in the valuation business.

A comp flatly, is a closed sale sharing as much similarity as possible with the home being valued. A good comp will be a recent sale of a similar type of property from within (or nearby) the subject property’s neighborhood. In theory, the more similar the comparable sale, the more power it has. The base logic behind using comps to price goes something like this —if House A sold for $X, House B sold for $Y and House C sold for $Z, then your house should sell for some adjusted average of the three. The catch is, the comps used are the most appropriate ones available.

But, we have to ask, is this really accurate?

Maybe we should answer this question with another question: Would you drive a car by looking in the rearview mirror? I hope not. We look out the front window as we are far more concerned with where we are going than where we have been. Stated simply, we are more concerned with future events than past ones.

We (Realtors, the investors they serve, sellers and buyers) have all been trained for so long to look at the comps for guidance, but we fail to fully acknowledge comps are really events that occurred in the past.

Take a look at the chart below from the past two years. It tracks homes that went under contract across our region (Richmond, Virginia).

Do you notice a difference from the first half to the second half of the year? How about between 2014 and 2015? How about from May to August?

The core issue is a comp is not a fact, as much as it is a result. The reasons why someone else paid a specific amount for a specific home at a specific point in the past is a combination of many complex inputs that do not lend themselves to easy analysis. Inventory levels, interest rates, consumer confidence, seasonality, the “wealth effect”created by the Dow Jones Industrial Average and NASDAQ, mortgage rules, the Dodd-Frank Wall Street Reform and Consumer Protection Act, job growth (regionally, nationally and internationally), population trends …all of these combine to influence buyer behavior.

This is not to say that using comps to help price a home is without merit, as understanding what has happened recently is a good place to start. If you can determine a point from which to begin your analysis, it is a great help. Establishing patterns in past behavior has value …it is just that using comps exclusively falls short, especially in a dynamic market. The quicker the market shifts, the less value any individual comp has. And the last time I checked, the market is still moving extremely quickly.

So what to do? Your excuses are now gone —the “big data”of REIAComps is upon all of us. It is up to you to take the next step.

Use this knowledge about comps to look all around your subject property and determine the best acquisition value and after repair price.

The use of REIAComps to determine the best acquisition and ARV for every deal you look at is the best real estate decision you will ever make. Don’t for one moment let someone tell you the value of a deal. Let REIAComps show you for yourself.

Mark JacksonMark Jackson is an appraiser, real estate investor and property valuation specialist who teaches others to get more out of their real estate investing business. In 1999, Mark founded an appraisal company and soon found his true gift was analyzing property values for real estate investors. Since 2000, has closed millions of dollars’ worth of his own domestic and international real estate transactions. Mark’s passions are: faith, family, golf and real estate.

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