“Comps” Why Is It Such A Dirty Word In Real Estate?
By The End Of This, You Will Understand
How everyday people view “comps” and what it means to them
If you’ve ever had any interest in either buying or selling a piece of property, you can bet that the word “comps” has either crossed your mind, or, have been something you automatically think to produce.
But let’s take a moment and think about what “comps” are and more importantly, where “comps” came from in the eyes of the general public.
Pt 1: "Comps" & "Commissions" The Dynamic Duo
Introducing the public to reality real estate TV shows
The public is deeply in love with the idea of real estate and the sheer number of real estate reality TV shows reinforces this.
With the click of a TV remote, a tap of a phone screen, or a tap of a laptop mouse, anyone can become immediately immersed in the world of real estate reality TV, and this is no surprise to anyone since reality TV shows have been ragingly popular for the better part of 3 decades now, so it does make sense that real estate reality TV should see its success as well.
The issues begin when the watchers of these scripted shows begin to believe what they see and hear from within them.
In shows like these, the premise is generally the same:
– Main Actor(s) are met with a challenging property / buyers / sellers
– Main Actor(s) are faced with a difficult related decision they must solve
– Main Actor(s) are attempting to uncover a selling / buying price
– Main Actor(s) are “in trouble” but use “comps” while poorly defining them
– Main Actor(s) miraculously discover a resolution, at the right time!
– Main Actor(s) ride(s) off into the sunset with huge commissions
Within that recipe of a reality show, the real estate element will almost always call for “Commissions” and “Comps”. These are the “bread and butter” of real estate reality TV.
Rest assured, these “Commissions” and “Comps” are faker than a $3.00 bill.
Commissions – Big numbers bring big ratings. Imagine if you were a real estate show where the commissions or agent income were the national average…no one would tune in to watch the show. So these numbers are artificially inflated and are scripted to grow viewership.
These absurd “commissions” that get flashed on screen are outrageous and are there solely to “wow” an audience and the word “comps” is immediately recognizable as the major staple of the show, and therefore likely the driving factor for many reality show viewers.
Source: National Association of Realtors / NAR.realtor
Comps – Is a shortened way of saying “comparables.” This is another term that is recklessly tossed around in both reality TV and among everyday people.
When attempting to forecast the present (or even future value) of a property, “comps” are the main source used to do so. The problem is that reality shows have bastardized this word, so much so, that anyone and everyone firmly believes that they are capable of “comp’ing” properties at their discretion.
But what does it mean to “comp” a property in actual real estate terms?
Veteran Licensed Real Estate Professional Charles Bianco produces comps in the form of a 15-20 page report that fully details the true value of a subject property. This report will include, for example, sold properties within the last 6 months that match the subject in terms of interior and exterior square footage, amenities, upgrades, condition, utilities, geographic location and range, schools, equal number of bedrooms and bathrooms, property type (according to building codes) and more.
You’ll notice that what he does not cover “what the neighbor listed for” or “what the guy around the block is selling for”, these are not comparables and they are not valid.
We feel bad for the most are licensed bank appraisers. They are the ones who are being “stepped on” whenever an ordinary homeowner (or unlicensed individual otherwise) feels that they can “comp” their property or a property of interest.
Pt 2: So Then Who Does The Public Turn To?
A hero had emerged, or so people had thought…
There is an obvious need for information when it comes to real estate, especially since we’re focusing on what may be the largest transaction of many people’s lives…how could there be so few “reliable” resources and choices for people in this area?
Since the internet came into existence, there has always been any number of websites touting themselves as the “go-to” website for real estate. Many have come and gone, but one has always stood out the most, Zillow.
Zillow has proven itself to be the #1 real estate information website in the United States and with tremendous financial backing, their having gone public on the stock market, and thousands upon thousands of real estate agents who pay monthly to be a part of the website, it’s no wonder that Zillow has such a hold on the real estate consumer public.
With that said, it’s also no wonder that the real estate consumer public holds their information as the gold standard, if only because whatever source would be considered second place, is a very, very, very distant second place by comparison.
This does not mean that Zillow is without its flaws, however.
In February of 2006, Zillow introduced the “Zestimate” to the public.
Zillow defines its “Zestimate”in the following way: “…A Zestimate incorporates public, MLS and user-submitted data into Zillow’s proprietary formula, also taking into account home facts, location and market trends. It is not an appraisal and can’t be used in place of an appraisal.”
Sounds great, until you realize that the Zestimate does not accurately value a home on actual comparable parameters, it only values properties based on information which is subject to error and its own internal algorhythms.
As a result? Zillow admits that its “Zestimate” and the information they provide is subject to error, and those errors can be significant.
Source: Zillow.com | Zestimate Accuracy Stats
The above chart was taken directly from Zillow’s own Zestimate website page. It explains that properties with Zestimates that are “off market” (aka: your home if it’s not listed for sale) are subject to a median error of 8.24% here in New York. What does that mean?
If your Zestimate states that your home is worth $700,000, and there’s an 8.24% error rate, then the Zestimate you see for your home could be up to $57,680 LESS than what your home could appraise for, or, up to $57,680 MORE than what your home could appraise for. Either way, if you trust the Zestimate model, you could be easily be putting the value of your home in tremendous jeopardy.
Needless to say, some people do trust in the Zestimate, and this is because the general public does not have a resource better than Zillow, except for an actual real estate agent, or an actual bank appraiser.
Pt 3: How Do You Actually Create "Comps"?
The right way to create comparables of a property as a consumer
So now that you know the truth about where “comps” come from and how flawed the Zillow Zestimate is, the only logical question that remains is: “How do I as a non-licensed consumer create my own comps?”
It’s a great question, and the answer may not be one you like, but we’ll take a swing at providing an answer of substance.
Okay, so let’s begin creating comparables (notice how I didn’t say “comps” here, amateurs say “comps”). You’re going to want to write down the following:
1. Find SOLD properties within the last 6 months
2. Make sure those properties match the subject property type (ex: Colonial)
3. Make sure it has the same heating/cooling elements
4. Make sure it has the same exterior yard size
5. Make sure it has the same interior living space
6. Make sure it’s the same type of property (1-fam / 2-fam / etc)
7. Make sure it has the same interior layout (ex: Basement / beds & baths)
8. Make sure to match the school district if possible
Those 8 parameters will give you what you need to compare the home you’re interested in (if not your own) toward getting what may be an accurate property value.
Since you do not have access to the licensed tools and resources an agent does, we will have to figure out another way to find these comparables. One way would be to visit Zillow and use their map feature to locate properties in the area. You want to make sure to look for SOLD properties only. Properties for sale and properties that are “under contract” or “pending” do not count toward this since appraisers and real estate agents only care about what a home sold for.
Chances are pretty high that you will not find properties that exactly match the property you’re interested in getting its value for, so you’re going to have to do some real homework here. Appraisers have software (and specific training) that enables them to accurately add and subtract value to a subject property based on the differences between the comparables and the subject property (i.e. the property you want to get the value of).
Since you do not have this software or training, you’re going to have to estimate it on your own. Essentially you have two choices:
1. Take a guess. Best of luck.
2. Research the cost of each difference and apply it
If you chose option 2, then you’ve got a task ahead of you.
Using Google, you can simply type in the search bar the following:
“How much does it cost to build a ________?”
OR
“How much value does a ________ add to a property?”
This is a crude way of getting the values, but at least it’s something. Chances are decent that the website that will provide the answer may or may not be reputable or even accurate, so be sure to double-check it for accuracy. Additionally, make sure that you factor in the cost of construction as well, not just the “valuation.”
POWER TIP: When it comes to construction / contracting, it’s no secret that whatever work is done will “increase the value of a property,” but what they won’t tell you is that the cost to do the work will likely, if not definitely supersede the increase in value!
Now that you have all of the information put together, you should essentially have what looks like a book of information and research in front of you. That’s about 1/2 of what an agent or appraiser does and produces when they do this themselves. Congratulations!
It’s not to say that following these steps will get you an accurate valuation, you still have to consider the very real fact that you (despite how many homes you say you’ve bought or sold) are not a licensed professional and more importantly do not have access to the proper tools necessary to do this accurately.
But if you keep an open mind and do this task to the best of your ability, the chances are decent that your valuation may only be 3%-5% inaccurate, which is still significantly better than Zillow and their Zestimate. To this, you can enjoy a nice cold beverage!
Ultimately, if you decide that performing these hours upon hours of research, only to still be relatively inaccurate in your research is not appealing, you can always…
CLICK HERE if you’re looking to purchase a property, and get a professional comparable report as part of our service.
OR
CLICK HERE if you’re looking to list your property for sale and would like the most accurate valuation of your property done for you by a professional.
