What Search Criteria Should You Use When Searching For Comps?
I often get asked by agents about the best way to find comparable sales when pricing a listing. Today I thought I would share the search criteria I use and the reasons for each of them.
Agents and appraisers are not that different in their desire to determine an accurate market value for a property. Agents are looking out for the best interests of their clients and always want to sell their houses for the highest amount possible, however, unless a buyer is paying cash and does not need financing they will need to obtain an appraisal.
The contract price and appraisal value will need to line up or the buyer will not be able to get a loan to pay for the property. If agents utilize the same methods appraisers use in their appraisals there should not be a vast difference between the two values and the likelihood of a deal falling through will be minimized.
I’ve listed below the top search criteria I look at when searching for comps during the appraisal process. If you have any questions feel free to contact me, I’d be glad to speak with you.
1) School System – School systems are one of the most important considerations that most buyers look at no matter where your market is. The quality of local schools is a significant factor influencing property values. Families often prioritize living in areas with reputable schools, making it crucial to consider these criteria when selecting comps. Agents should look for properties within the same school district if at all possible.
Homebuyers, especially those with children or planning to have them, are willing to pay a premium for homes in areas with excellent schools. On the contrary, properties in areas with underperforming schools may not command as high a price. Therefore, when searching for comps, agents should factor in the impact of the local school system on property values.
2) Square Footage – The gross living area (GLA) of a home is one of the top physical characteristics of a property that determines its market value. When all else is equal with a property, those that are larger will sell for more.
Of course, as a home gets larger and larger each additional square foot contributes less and less value. This is commonly known as the law of diminishing returns.
Besides the actual square footage, you will also need to consider the floor plan arrangement. Two properties that have the same amount of square footage but a totally different layout may have different values.
I once did an appraisal on a property that the owner had purchased as a three-bedroom two-bath home but after buying it reconfigured it into a one-bedroom two two-bath home. The bedroom was larger than typical as you might expect and had a very large walk-in closet. This person was single and had made the changes to fit their preferences, however, as you might expect the different floor plan did not match up well with other homes of similar square footage that had a more conventional floor plan.
When considering sales for comps it is important to bracket the square footage so that you get a more complete picture of how square footage affects the sale price of a home.
3) Year Built – The year a home was built and its age can affect its value. Of course, you must consider any updates or changes that have been made to it.
For the sake of our discussion about choosing the best comps, we will assume that the sales we are looking at are similar in condition and degree of updating. It is important to pick comps that are similar in age because when all else is equal a home that is older will usually sell for less and one that is newer will sell for more.
Older homes may have unique features or craftsmanship that adds to their value, while newer homes might have modern conveniences and energy-efficient technologies. Agents should be mindful of these factors and choose comps that align with the target property’s age to provide a more accurate reflection of its market value.
Furthermore, understanding the historical context of the real estate market in the area can provide insights into how age influences property values. In some neighborhoods, older homes may be highly sought after, while in others, newer constructions may be more desirable.
4) Date of Sale – The date the comp sold is also an important factor to consider. Over the past several years we have all seen drastic changes occur in the market.
These changes must be considered when looking at when the comp sold. In a stable market using a 6-12 month old sale may not be a big thing but in a rapidly changing market, this amount of time can be significant.
In fast-paced markets, where values can change rapidly, more recent comps may be necessary. In slower markets, where properties take longer to sell, a slightly longer timeframe might be acceptable.
Agents should also consider the seasonality of the real estate market. Prices may fluctuate based on the time of year, with spring and summer typically being more active seasons. Adjustments may be necessary for sales that occurred during peak or off-peak periods.
5) Neighborhood – I always begin my comparable searches within the subject’s neighborhood. I do this because sales from within the neighborhood are going to reflect everything that is happening economically and locationally with the property.
Sales within the same neighborhood will be subject to the same outside factors that the subject will be. The only things that need to be adjusted for are time, if there are any differences, and the physical differences between the subject and sales.
Properties in the same neighborhood often share similar amenities, community vibes, and proximity to local services and attractions. Buyers are frequently drawn to specific neighborhoods for reasons such as safety, walkability, or access to public transportation.
When selecting comps, it’s important to focus on properties within the same or similar neighborhoods to ensure that the market conditions and desirability factors align. If there are no sales within the same neighborhood then you can expand your distance parameter but stay within a competitive market area. While it’s essential to consider broader market trends, honing in on local differences can provide a more accurate reflection of a property’s value.
Other important factors to consider are neighborhood-specific trends that might impact the selection of comps.
6) Site Size – The size of the lot a house is situated on can influence its overall value significantly. Because of this, it is important to choose comps that have similar lot size and land value.
When selecting comps, it is important to consider not only the total land area but also the shape, topography, and potential use of the land. For example, a property with a large backyard may be more desirable than one with a smaller or less usable outdoor space.
If your subject property is situated on a one-half acre lot you obviously would not want to include sales of houses on several acres. While sales with larger parcels are not totally forbidden if you need to use these types of sales you must adjust for the land size differences.
You should also keep in mind that the buyer profile for a property with a half-acre lot may be totally different than one who is searching for a home on larger acreage parcels. A person who is looking for a smaller garden home size lot may be making that choice because they do not want to worry about the upkeep of a larger lot so homes on larger lots would not be acceptable.
In addition, you also have the scenario with larger parcels where the land could either be considered excess land or surplus land, which can influence the value.
7) Condition and Quality – The condition and quality of a property are key features in the value of a home. The value of a property is directly proportional to its condition and quality.
Houses that are low quality and in poor condition will sell for less than those of higher quality and in better condition. In addition, it is important to only look in neighborhoods that have homes that are similar in quality.
If you look at neighborhoods that have superior quality the upper range of value will probably be higher and this may skew the subject’s value. If you use a sale of superior quality you must adjust for this or the value may not be accurate.
8) Money Makers- I classify a money maker feature as one that significantly moves the needle on the sale price. Examples include finished basements, extra land, pools, workshops, barns, nice storage buildings, waterfront lots, golf course lots, boathouses, updates, views and renovations, etc.
When using these features as search criteria if you cannot find sales in the subject neighborhood then it is acceptable to expand your search parameters as I noted above.
Bonus Tip
Criteria You Should Not Use
1) Estimated sale price – You should never search for sales using the value you think your property will sell for because you will always find support for that price. You should always let the physical characteristics of the home and its location do the talking about value.
2) Price per square foot – This is the biggest mistake I see agents make. If you only look at the price per square foot of the sales and do not pay attention to everything that the sales have this can give you a wrong indication of value.
The price per square foot metric can provide useful information in neighborhoods where all of the houses are similar, however, in more diverse areas where house features vary it may not be as accurate.
The Search Process
I start off my comp searches using all of the criteria noted above. If I have enough sales to use then that’s awesome, however, that is not always the case.
It may be necessary to tweak my search and either go back a little in time, go further away, or expand the search parameters like square footage, etc. This usually provides adequate sales to use.
Something to remember is that if for some reason you cannot find sales with the money maker features it is okay to use sales without this feature. If this happens you will need to adjust for the feature separately, whereas before it was “built-in” to the sale. Learning more about how appraisers make adjustments will give you insight into how to do this but that is a discussion for another day.
Conclusion
I hope this discussion has been helpful for you in honing your comp selection skills. If you have any questions feel free to contact me and as always thanks for reading.
Your articles have been very helpfull I guess when it comes right down to it you just need to go for it and get the appraisal. I have some rental houses that im trying to remodel and trying to borrow the money to finish them. But running out of money and time so i dont know what the bank is going to think with so much work still to finish them and wha5 the appraisers going to do about all the unfinished work
I’m not sure what type of loan you are getting but it is possible for the appraiser to do a “subject to” appraisal where they will appraise it based on the work that will be done. You would need to provide the appraiser with a scope of work. You would have to get the lenders approval to do this but it is possible on the appraisers end of the transaction.
The school system is so important to buyers. It seems like I’ve seen some pushback on appraisers for mentioning school boundaries or a specific school in an appraisal. Have you seen that? Or am I just misremembering something online? To me it shows market expertise to be in tune with stuff that is important to buyers.
Ryan, I have not seen that myself. It may be part of the new trend within appraisal reports of getting away from stating some type of apparent subjective information. I see no problem in stating that the subject property is 1 mile away from John Smith Elementary since it is a statement of fact. In some communities I think buyers find being within walking distance to a school to be very important.