Re: Another question about comps - Posted by Killer Joe
Posted by Killer Joe on May 21, 2005 at 20:01:42:
Hi Ted,
Here’s a little ‘Comp-101’, and oh my goodness, one more thing to read.
Let’s break a comp down to its most vital function. It allows you to know by ‘Comparables’ what the money is chasing in your area. By that I mean it is an historical look at what people will actually pay for a property that resembles yours.
So when we see exactly what others have paid for such properties we know what the same mentality will value our property at. It is to some degree a measure of what the herd will follow.
By learning your markets through getting to understand the values of the properties, and what the folks who are buying these properties are willing to pay for them, you will in effect possess a mental catalog of values that pertain to your area.
If you spend enough time, and look into enough properties that are on the MLS, for example, you will be able to make a correlation between what a REA has priced the property at, and what the public has priced the property at. The MLS will give you the “Days On Market” (DOM) for any property you are looking at. It will tell you that the price it is listed at as not attracted any money yet if the DOM is past the average for those types of properties.
Some will argue that the property has not sold yet due to poor exposure. That doesn’t matter, if it’s on the MLS it will be liquid at some point, and it hasn’t found that point yet. Perhaps the seller and/or the REA are out of step with the ‘money’ and have ‘comped’ the property but have not ‘priced’ the property.
What I’m getting at is if you do not understand your market from a personal perpective a comp is just an ‘average’, and may in fact be very misleading relative to your property. Most houses are not comodities, but unique structures that change over time. The most obvious exception to this statement would be a tract house that has very little changed about it from the its construction if its in a newer tract. Plain Jane condos and the like also follow this, but this post most relates to SFHs.
This btw, is a contrarian view to what most will tell you, about comps. But let me give you an example of why relying on comps does not always favor your position, and in fact can be cost you money if you don’t know your market, and just rely on what the herd does.
The property I sold last month was a 3/1 that I was told by the REA would sell for $539K due to the fact that all the comps ran from $515K to $537K. I know my market, and I, ME, Yours Truly, had the price set @ $579K because that is what the market would be willing to pay for my property. I sold it in two weeks for $574, because that was ‘good enough’.
So my message to you is this…when you sit down with a REA, (and you can find ones that are new and helpful to young investors), watch how they determine comps for you. They will most likely tell you that your 3/2 is worth the same as all the other 3/2s, because that’s they way they see it. They are part of the herd. Don’t you be part of the herd, go out and take the time to learn your market so you will know intuitively what the money chases in your area.
I hope this helps, now let’s sit back and watch the fireworks.
KJ