One of the quickest and surest ways to determine value in real estate is to look at comparable sales (comps). This is especially the case in residential property. The principle is simple to understand. If a house that’s comparable in most ways to yours sold for $500,000, then chances are yours is worth close to that amount too.

It’s a good idea to examine at least three to five comps to get a good sense of the local market. Of course, there are many concerns with using comps as an appraisal tool. These include the timeliness of the comps, their true similarity, even the reliability of reported prices. We’ll also look at these in the next questions. But first, it’s important to understand that not ail properties have comps. If the house you’re considering purchasing is in a tract of hundreds of similar homes, than finding comps should be no problem. With condos and co-ops, finding comps is also usually no problem.

But if you’re considering a unique home (for example, one that was custom built), then finding comps can be difficult. This is particularly the case in higher-priced and rural areas. And when nearby comps aren’t readily available, they can throw off the appraisal process.

For example, when professional appraisers can’t find nearby comparable homes, they sometimes will go to a distant location, perhaps dozens of miles away, where a similar home might have sold. They will extrapolate from that sale to the subject house. However, since all real estate is local, what homes in one area are selling for may have no bearing whatsoever on what homes in another area are selling for.

If there are no comps in the immediate area, you should consider alternate methods of appraisal such as square foot cost, replacement cost, and capitalization of income
Are the comps recent?

For the comps to be useful, they must be recent. How recent really depends on market trends. If the market has been slow moving, prices changing only a few percent a year, then a comp that’s a year old may be fine to use. On the other hand, if the market is rapidly accelerating, as has been the case in recent years, then comps that are even six months old might be considered out of date.

You might want to strive to get only comps that are from the most recent sales. Beware of real estate agents who go to their computers and pop out a dozen comps for the subject property and want you to use them for comparison when shopping. Check the dates. These older comps can lead to your making offers that are too low or too high depending on market trends. As a result, you’ll miss out on getting a property for a good price.

Have I forward priced the comps?

It’s important to remember that no matter how recent the comps may be, they are always going to be slightly out of date. The reason is that they reflect where prices were when the comparable properties were sold, not where they are today. However, sales prices are seldom released until after the deal has closed. (This is to protect the seller, who might have discounted the sale, from a new buyer who comes in after the sale has fallen through and now wants the discounted sales price.) This typically takes a minimum of 30 days, sometimes longer. Further, you may not find any very recent sales, so you could be relying on property that was sold up to six months (or more) ago. During that time span, the market may have changed sig-nificantly For example, if the market is going up 12 per-cent a year, in six months it’s presumably gone up 6 percent (half a year’s worth). Thus, a comp from six months ago should be adjusted upward by 6 percent to reflect today’s true price. (If the market is declining, the same principle applies.) This is called forward pricing. It’s adjusting comp prices to the current market. It works both when the market’s going up and when it’s going down. Failure to make this adjustment is what often leads sellers to offer their homes for less (or more) than they’re worth. A buyer who has forward priced the comps may see such a seller’s error and obtain a bargain price.

Are the comps truly similar?

You  want to compare apples with apples, not  with oranges. Even in a tract setting, there may be many different models with different floor plans, square footage, and amenities. Therefore, it’s important to scrutinize the comps and to make adjustments where possible.

For example, your home has a swimming pool, but comp homes do not. Obviously your home is worth more because of the pool. {Don’t make the mistake of adding in the price of putting in a pool—the added value may be only 20 to 25 percent of the cost of putting in a new pool.) ‘ You should subtract from the price when the comps have more amenities or are better in some way and add to the price when your home has more amenities and is some-   -how better. Homes that have been upgraded, even if they are the same model as yours, will command significantly more than a house that has not been upgraded and vice versa. What should become quite obvious is that this is an approximation game, not one with scientifically verifiable information.

Nevertheless, as agents will confirm, after a while you get a feeling for the neighborhood and the comps and can come quite close to accurately appraising a house. Many agents who farm areas (farming means getting to know a neighborhood and regularly soliciting listings there) can often pinpoint the right price for a house just by walking through quickly. A savvy investor should develop the same skill.

Can I rely on the comp price?

Are the prices announced in the MLS (Multiple Listing Service) the actual prices received by sellers for the homes? Or have they been changed or manipulated in some way? Generally speaking, I’ve found that the reported prices tend to be highly accurate, especially today when financing is critical and the sales amount determines the mortgage size. However, keep in mind that there is often a significant difference between sales price and asking price. In a normal, calm market the sales price is typically between 5 to 10 percent lower than asking price. In a hot market, the sales price might actually be higher than the asking price! And in a cold market, the discount might be far greater. It can be helpful when trying to appraise a property to check out other homes listed nearby. Just keep in mind, however, that their asking prices may be far off what they actually will sell for once a buyer who is ready, willing, and able appears.