With real estate sales or purchases, comps are very important. These are comparable properties, and they help to define the value of another property. For instance, if you’re selling a three-bedroom home for $500,000 but the comps in the area show that three-bedroom homes are all selling for $400,000, your value may be too high.
However, comps are not perfect. There are certain things that can throw them off and make them inaccurate, including the following:
The sales happened a long time ago
Comps only work when the sales happened recently. If it was more than six months ago, the real estate market could have changed so that that sale price is no longer accurate.
The comp is in the wrong location
Values can change very drastically from one neighborhood to the next. This is true for both residential and commercial real estate. If the comps are in the wrong location, you’re going to get inaccurate values.
The homes haven’t actually sold yet
In some cases, people will consider homes that are on the market to be comps. If everyone around you is selling properties for $300,000, for instance, it’s assumed that your house is probably worth about the same. But the problem is that you can’t know if that property is actually going to sell for $300,000 or if it will be much more or less. Listing prices do not work as comps.
The real estate process can be very complicated, and you can see how important it is to get every detail right. Be sure you always know about your legal options.