When preparing to list a home for sale, sellers and their agents will use closed comparable sales, also known as ‘comps’, to help determine a proper list price for the property. Comps are valuable tools for calculating an approximate market value for residential properties in any given real estate market. To determine what is comparable, one must consider all the physical attributes of a home including location, style, size, age, condition, amenities, upgrades, number of bedrooms and bathrooms, amongst other aspects. As well, there is one non-physical consideration to consider, and that is time since the property sold.
All else being equal, the more recent the sale is, the more weight should be placed on the comp’s value. Historically, in a balanced market, comps sold within six months were acceptable to use. As the market gained momentum since the COVID-19 pandemic and homes began selling in a matter of weeks, if not days, a short timeframe of within 3 months became the acceptable level. However, as the market has begun to shift over the last several years, homes are sitting longer on the market, and using comps within the last 6 months will likely return to being the common practice.
Comps in the Current Market
In this market, a seller looking at comps to pinpoint their own target list price must be a little savvier than in years past. The market has gone in a unique direction over the last several years, still feeling the effects of the pandemic and economic changes.
Depending on how recently an individual property sold, it is not uncommon that time impacts the validity of the comps as the market changes. Often these changes are due to seasonal patterns but could also be related to economic factors such as what we are seeing now; higher mortgage rates, buyer affordability changes, consumer sentiment impacting motivation to buy or sell, and inflation. These factors impact supply and demand and therefore how much a buyer is willing or able to pay for a home.
That’s why comps are based on closed sales and what the buyer paid, not active listings and what the seller listed it for. Market value is determined by sales, not the high hopes of a seller.
Time and Comps
It typically takes 30-60 days for a property to go from under contract to closed. The market has continually changed in most cases from when the property closed to when the comps are pulled. For example, say a property closes in mid-March, that would mean it was probably listed in January when there were very few homes on the market, many more buyers competing for the property. The buyer made an offer, likely underwent a multiple offer bidding war, and eventually negotiated a deal where the seller accepted an over-asking sale price.
Take this home for example. Earlier this year, the property went on the market and in just 7 days, came off the market and sold for well over the asking price. Competition was high, inventory was low, and there were bidding wars happening everywhere. This home sold for $70,000 over asking which is reflective of the market conditions during the winter months.
Three months later, let’s say a seller a few blocks away pulls comps to determine their list price to list in June. The above closed property comes up due to similar characteristics, condition, size, etc. The seller sees the sale price and thinks, “Great! I’ll list my house for that price. Right?”
Not necessarily. You have to think about the June market. Now, it’s the opposite of the February set of circumstances in that there are fewer buyers competing and outbidding each other, mortgage rates are still increasing, as is inflation, and all these factors are diminishing what a buyer can afford. If the June seller lists their home at the winter market premium, their home will likely sit on the market without much interest, and then a price reduction would likely be in order.
Within that same buyer pool looking for a home in that neighborhood, near local schools, with that number of beds, baths, and yard, some can no longer afford that list price. This is due to mortgage rates impacting what they have to put down and what their monthly payment will be for presumably the next 30 years (or until rates drop and they theoretically refinance).
Here is an example. This home was listed on 5/10/2024 for $549,000 and sold for just $1,000 more. During this time, there were more homes on the market, less buyer competition, and with inflation much higher than earlier in the year, buyers were able to afford less. This is much different from the February market example above, and something that sellers should keep in mind when they discuss sale price with their REALTOR®.
The smart seller will look at the February comp, take into consideration the changes the market underwent over the past several months and then price accordingly with their REALTOR®’s expertise.
When Analyzing Comps, Remember to Look at the Whole Picture
This brings us back to the important premise that although home sales prices are confirmed on the day the closing occurs, the market forces that were in effect at the time the sale was negotiated 30, 60 or even 90 days earlier have changed significantly over the past few months since the closing. Consequently, while pulling comps is a valuable tool for establishing a list price and informing buyers about affordability, these figures must be interpreted with caution. Relying solely on comps without considering recent market fluctuations can lead to inaccurate assessments. A comprehensive analysis that incorporates both historical data and current market trends is essential for providing reliable guidance to buyers and sellers alike.