What is a comp?

What’s a comparable property? Or a “comp,” as we say more informally?

Let me give you an example of an appraisal report I saw recently, which is why I’m asking this question: There are 65 comparable properties currently offered for sale in the subject’s neighborhood, ranging from a price of $330,000 to $5,400,000. The report also states that there are 44 comparable sales in the subject’s neighborhood within the past 12 months, ranging from $152,000 to $2.2 million. That’s a big range. Are you comfortable putting that in your report?

What does the term “comparables” even mean? Let’s go to the authoritative sources. Here’s one: The Dictionary of Real Estate Appraisal, published by the Appraisal Institute. It defines comparables as “a shortened term for similar property sales, rentals, or operating expenses used in the comparison in the valuation process and best usage. The thing being compared should be specified.” In other words, are you looking at comparable sales, comparable rentals, or comparable listings?

The next one I’ll read is from The Language of Real Estate: “[Comparables are] properties that have been recently sold or leased and are similar to the subject property sale. Prices of these properties are used to estimate a value for the subject property. Comparable properties need not be identical to the subject but should be similar and relatively easy to adjust for those differences in order to arrive at an indicated value for the subject. Also called ‘comparable sales,’ ‘comparable properties.’”

We refer to them as “comps” a lot.

Here’s a definition from an older book, Real Estate Appraisal Terminology, by the American Institute of Real Estate Appraisers: “An abbreviation for comparable property sales, rentals, incomes, etc., used for purposes of comparison in the appraisal process.” Here’s one from Barron’s Dictionary of Real Estate Terms: “Comparable sales — properties that are similar to the one being sold or appraised. Here’s an example. A subject property is a detached three-bedroom house that’s 30 years old and will be bought with an FHA loan. Comparables would be recently sold houses with similar style, age, location, and financing. Slight variations in characteristics may be taken into account when making the analysis.”

Lastly, I’m going to pull up the Encyclopedia of Real Estate Appraising. It’s a great big book, and it has a whole section on this. I highlighted one part of it because I like it: “What is a comparable property? It is one that would be a reasonable alternative for most prospective buyers who would be interested in the subject property.”

What is a comparable property? It is one that would be a reasonable alternative for most prospective buyers who would be interested in the subject property.” —Encyclopedia of Real Estate Appraising

That’s very simple, and it invokes some good, common sense.

So let’s think about what produces value: Scarcity. Utility. Desire. Purchasing Power. And let’s think about all that from the point of view of a typical buyer: Imagine you’ve found the perfect house. It has the number of bedrooms and bathrooms you want, the location and acreage you want. It’s charming, and there’s nothing else quite like it: you love it, and you could probably afford it. You’ve got utility, scarcity, desire, and buying power. So you knock on the door and ask the owner if she’d be willing to sell. She says no.

As a typical buyer, what would you consider as a reasonable substitute for that property? That is a comparable.

So let me ask you a question. Do you think a typical buyer interested in a $330,000 house, if it was no longer available, would go down the street and consider a $5,400,000 property as a substitute?

That’s a hard pill for this old Kentucky boy to swallow. Because I don’t think the typical buyer of that $330,000 house would have the purchasing power to buy a 5.4 million dollar property. And if we flip that equation, what about the typical buyer of a 5.4 million dollar property? Should it suddenly become unavailable, would they consider the $330,000 home instead? They can certainly afford it, but it probably doesn’t meet their utility. It’s probably not as big. They probably don’t desire it. I guess it’s possible, but it’s highly improbable.

When you’re doing your appraisal and using a form, it asks you: how many comparables are in the area in the last 12 months? How many are listings? They use that word comparable. So they’re not asking for the universe of sales, they’re not asking for the universe of listings. They’re asking for comparables. And if you truly believe in your heart and with your analysis that the two properties I described are comps, and you’re like “Hey, this is a quirky market, and you know, somebody that can buy a 5.4 million dollar house very well may you take the $330,000 dollar house as a substitute property,” okay — but be prepared to have support for that opinion.

Good judgement is your sharpest tool.

This article was adapted from the 2.4.24 episode of “The Appraisal Update” podcast, with Bryan Reynolds. Click below to watch it.