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Comps: Apples to Apples
| | Wednesday, August 25, 2004 @ 08:00 AM EDT
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Contributed by: Nancy Chadwick
Nancy Chadwick Properties
Read more archived articles about Buying
You're trying to figure out what a property is worth so you start looking for comps. How do you determine if those "comps" are really comparable and how can you use the data most effectively? Pricing any kind of real estate is an inexact science. There's no blue book that will tell you the value of the property, and buyers and sellers often make decisions that just can't be rationalized. There are plenty of myths about how to estimate value but there are few absolutes. This article focuses on residential comps because I use different methodology to estimate the value of development property and land. I'm a RE broker with 22 years of estimating values, but I'm not an appraiser. The following techniques have worked well for me on all sized properties -- from 1,800 sq. ft. ranchers to 12,000 sq. ft. mansions.
Location
First and most importantly (in addition to an accurate source of tax Assessor or MLS data and a good street map), you need to have an in-depth understanding and knowledge of the area and a well-developed sensitivity to the nuances of location. Finding property with a similar location is crucial because it is more difficult to adjust for location than, for instance, for age, amenities and size. Some say you should search within a 1 or 2 mile radius of your subject. But this may not give you accurate data. You might find 6-8 different neighborhoods within that radius with properties that aren't comparable. The likeliest source of comps is the same neighborhood and preferably the same street as the subject. Even then, you might have to adjust for location if the sales are interior properties and your subject is on a perimeter road or has other location challenges.
But what do you do if you can't find recent (6-12 months) sales in the same neighborhood? Here's what I do. I search within the same municipality for neighborhoods that are similar in housing style, age and environment that have the most things in common with the subject. You are likelier to come up with a more accurate value estimate if you compare apples to apples and not try to transform an orange into an apple. Until you get to the point that you can look at a map and know immediately which neighborhoods are similar to the subject's, you get in the car and drive through the municipality. You familiarize yourself with the diversity and disparity of the subdivisions in the municipality. If it's necessary to look beyond the immediate surroundings, you shouldn't extend the search into other municipalities and school districts since property values there may differ significantly. Before I use a property as a comp, I drive by it.
Time
When did the potential comps close? I try to use sales data that is no more than 6 months old so I don't have to adjust for older sales. But this depends on current conditions, so if it's a slow market, I may have to reach back farther in time. I only use closed sales, not those that are active listings or are pending closing. A sale isn't a real sale until money and title have changed hands.
Housing Style & Use
Different housing styles can result in different values. I try to stick with properties that are the same architectural style as the subject -- cape, rancher, twin, townhouse, split level, etc. Land use or zoning needs to be the same or comparable. I wouldn't compare a property zoned for residential with a commercially zoned property, even if the property had a residence on it.
Size
For differences in house square footage (at or above grade only), I use a factor of around $35/SF. This doesn't represent actual building cost but is my estimate of the difference in value of house size that ultimately gets reflected in the sale price. Likewise, I use a value of about $10K per acre for lot size. So if the subject is on a 1.5 AC lot and consists of only one separately deeded parcel, and one comp is on a half-acre lot, I would add $10K to the estimated value of the subject. Building lots in my area sell for much more than $10K, but in this example, the difference between the subject and the comp is just excess land area, not a buildable lot. If the subject or comp consisted of one or more separately deeded parcels (buildable lots), then the amount of adjustment would be my estimated value of the building lot.
Condition and Amenities
Things I take note of include maintenance-free exteriors, new or remodeled kitchens and baths, roofs, replacement windows, central air and other capital improvements. (Putting gold-plated fixtures in the bathrooms or hiring Queen Elizabeth to install finger parquet flooring will not substantially raise the value of most properties.) If the subject is in a neighborhood of homes with 2-car attached garages, and the subject has a 1.5 car detached garage (in addition to the 2-car attached space), I would probably make a downward adjustment for the detached structure. Yes, there is more garage space but the utility of the backyard has likely been destroyed or severely diminished. If the subject is an other-century home, I look for properties with similar architectural details, such as crown moldings, chair railing, wainscoting and walk-in fireplaces. The key is how similar the other properties are to the subject -- apples to apples. Unless I know the basement has been professionally finished, I am wary of upwardly adjusting for them because people tend to have different definitions of what "finished" is, and in any event, I tend not to count finished basement space in the house square footage. I also adjust for differences in the number of bedrooms ($5K) and baths ($3K and $1.5K for partial baths) and if there's a family or great room. In my area, a 4 BR home has more value than a 3 BR home; however, I wouldn't give a full adjustment for BR's above 4. I also adjust for public versus on-site utilities.
Age
There are many 18th and 19th century structures in my area. If the subject was built in the 20th century or later, I use a value of $1K for each year of age differential. EG, the subject is 20 years old and one comp is 8 years old. I subtract $12K from the estimated value of the subject. On the other hand, if the subject is 18th century, I try to find comps from that same century, and use around $25K for each 50 years of age differential.
CMA Spreadsheet
My CMA’s take the form of an Excel spreadsheet. You can find a sample one here
I customize the line items on the form to the particular situation. The above is on a property in a golf-course community of townhouses where each property abuts the golf course. This community was developed into 3 distinct types of townhouses. Each phase consisted of homes with different sizes and features. The oldest phase (the subject) tended to have the largest living area. The second phase had 2-car attached garages, and the last phase consisted of the smallest houses with 1-car garages. I only used sales of properties in the first phase for the CMA.
As you can see, I make upward and downward adjustments to the projected value of the subject based on features and characteristics of the comparables. The second column for each comp contains the plus or minus dollar adjustment in thousands of dollars for each property characteristic. The property listed as Comparable #3 really isn't a comp since it's an end unit with a first-floor owner's suite, but I included it here just to show you the adjustments I would make if I had to use it.
The bottom line is the range of prospective sale values of the subject after the adjustments, positive or negative, are totaled. If I've done my job right, the projected sale values should fall in a relatively tight range, and the spread between the lowest and highest shouldn’t exceed 5%.
Note: Nancy Chadwick has developed two books about developing land and conducting research as an investor.
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