Home-buyers and Home-sellers always ask ‘How much is my home worth?’
The comparable sales approach is the answer.
Price is determined by buyer and seller. Comparable Sales are a great way to figure out the current market value of a property- but what the property is ultimately worth is what the buyer is willing to buy it for and the seller is willing to sell for. During hot real estate markets, prices are determined by competition.
The Comparable Sales Approach is the most common method to determine value of residential real estate.
How to use the Comparable Sales Approach?
Step 1: Find Comps
Ask your real estate agent to pull the ‘comps’ for you on a property you are considering writing an offer. This takes an agent 30 mins to 1 hr. If your real estate agent really knows the local market well, they will know the best comp in their heads. If you have been looking for a while and written offers on properties that were sold to another buyer in multiples, you will probably know the best comp yourself.
A Good Comp should be:
- SIMILAR LOCATION – Neighborhoods differ, make sure the property you compare is the same neighborhood.
- RECENT – Comp should have sold within the past six months- the more recent the better. Market conditions change and affect home values. If you use older comps be careful to adjust for market conditions. When the market is moving very quickly comps even 3 months ago aren’t a good comparison, whereas when a market has been flat for a year or two, you can use comps from way back and be OK. Here is a quick example- let say the comp you are considering is the last sale in the same 10 unit condo building as the subject property. The comp sold two years ago for $500,000, and this is the best comp you can find. You know that in those two years the market was flat one year and went up 5% another. Take that old comp in the building and adjust it up 5% to get $525,000- the market price of today.
- SIMILAR CONDITION – fixers should be compared with fixers, clean properties with clean properties, and new or remodeled properties with new or remodeled properties. Year Built can have significance.
- SIMILAR SIZE – Same Square footage, Bedroom Count, and Bathroom Count. Square Footage shouldn’t vary more than plus or minus 20% of subject property.
- SIMILAR AMENITIES – If one property has a garage and another does not, the property with the garage should be worth more right? If a property has a pool and one does not, the one with the pool should be more right? If a property is missing an amenity you can make an adjustment for the amenity cost. For instance, that garage might be worth $20,000 to $40,000, the pool $40,000 to $60,000.
Use sold prices and not other active listing prices. As a seller, there is no law that says you can’t list your house for whatever pie in the sky number you want (and some do!), so active listings- while they might give you an indication of value, are not good for comparison. We want to know how much a buyer paid for a similar property, not how much another seller hopes to get for theirs.
Pricing Property in Los Angeles is very much an art and not a science. Every lot has its own unique location in space. Every property UNIQUE. When a client asks me “what do you think the property is worth?” That is a tricky question to answer because value is relative. I can tell you what the recent comparable sales + Market conditions indicate the current market value is, but don’t expect an exact number with two decimal places. Los Angeles has been built up with many custom homes- with different ages, floorplans, materials, various upgrading over the years, architectural styles, location in regards to shops and restaurants, proximity to busy thorough fairs, or in hilly areas, or at the end of culdesac. Add to that that the market is constantly changing and you can see that the answer to the question above is “it depends”.
Pricing property is like trying to pin the tail on the donkey.
Comparable sales are called “Comps” for short.
As a buyer I always recommend you look at the comps before you write an offer. One good reason to do this is it will tell you if you might run into an appraisal problem in escrow. Appraisers use comps too, if you can’t find any as high as your offer the appraisal may fall short and you/and or seller might have to come up with more money. Another good reason, is you want to make sure you don’t overpay for a property! OR bid too low because the property was priced far below market value to generate excitement/multiple offers (ask the listing agent on a suspiciously low listings what they think the property is worth- the price they tell you is probably the price they told their seller and will give you an idea of where to come in at).
Evaluate the Comps
Now that you have found a few good comps evaluate them. I personally like to find ‘the best comp’ and put almost all the weight on that one.
Let’s look at an example:
The subject property is a 3 bedroom 2 bath 1,500 sqft California Bungalow, built in 1940, that has had some recent updating (copper plumbing, electrical, new roof, kitchen remodeled 10 years ago) on a 6,000 sqft lot in the Hancock Park/Larchmont Village neighborhood. How much is it worth?
When we searched the sales for the neighborhood we found three similar sales:
3 Br 1.5 bath California Bungalow, built in the 1940’s, clean condition, on a slightly larger lot of 7,500 sqft and a pool. This property sold for $825,000 four months ago
Cape Cod, 3Br 1 Ba 1,300 sqft, much smaller lot- 4,500 sqft, just down the street from subject property, but it was a foreclosure sale and in bad condition. This property sold a year ago for $575,000
4 Br 3 Ba completely remodeled Larchmont Village house, 2,400 sqft and two stories. Sold two weeks ago for $1,180,000
Based on this information what do you think the subject property is worth?
With the above example, it looks to me like COMP #1 is the best comp to the subject property. We can also determine from Comp #2 and Comp #3 a price range for homes in the area. It looks like the fixer market is hovering around the $600’s and the ‘big house’ market is close to $1.2M. Our subject property does not have a pool. A standard Pools costs around ~$40,000- so that is a big plus that COMP #1 has over our subject property. However Subject property has a full second bath instead of a powder. Big difference is the lot- at 1,500 sqft larger in lot that can be a $40,000 – $60,000 difference in price. I’d say that the market value of the Subject property in my example would be worth $770,000 – $790,000.