What are Comparables and who uses them?
According to the Cambridge English dictionary, comparables (otherwise known as comps) are defined as things that you know the value of, especially buildings, that can be used as a comparison in order to calculate the value of something that you want to buy or sell. Generally, comparables is used as a real estate appraisal term, referring to recently sold assets that have similar characteristics to the target property. While comparables usually are used to the find value of an asset (sales comparables), they may be used to find out expected rent/lease rates, expenses/expenditures, other income, vacancies, cap rates, financials, growth rates, and relativity to the competition (amenities, offerings, financials, etc.). In the following, we separate these uses of comparables into sales comparables (to find value) and “other” comparables (to find other factors). Conceptually, the best comparable for a target property would be its next door neighbor with the same use, physical attributes, features, and amenities and was sold today with fair market conditions and market financing terms.
Real estate agents and brokers use sales comparables to find values and rents for clients who are looking to sell, buy, rent, or rent out a property. Generally, they will conduct a Comparative Market Analysis (CMA) to examine the prices of similar properties to determine a plausible price for the target property of their client. Redfin, a real estate brokerage firm, defines CMA as evaluation of similar, recently sold homes that are near a home intended to be bought or sold in order to establish the current market value of the home (www.redfin.com).
Appraisers typically use 3 traditional methods or approaches of valuing property: the sales comparison approach, the cost approach, and the income approach (further divided into income capitalization and/or discounted cash flow analysis). Appraisers will often use the sales comparison approach to value smaller, non-income producing properties with the use of sales comparables. Appraisers can work for a number of different entities who are searching for value such as government agencies, banks, private individuals, firms, etc.
Investors and developers will also use sales comparables to find the value of a property, but also may use “other” comparables (that may not be recent sales) to find out some of the various factors listed in the previous paragraph (rents, expenses, cap rates, RE taxes, etc) to create an accurate financial analysis.
How do we choose and use comparables?
When choosing the best sales comparable properties, the closer and more similar the comparables to your property, the more accurate your projections will be. Real estate is considered unique with no two properties being identical because of location. As can be seen on any of the listing websites mentioned in the next section, property values can change significantly over a couple blocks of distance and within the same neighborhood. Therefore, the closer the sales comparable property with respect to location, the more accurate it will be. It is also important that the comparables be similar in property type and use, as a different type or use can produce greatly different property values and other comparable factors such as rents, expenses, cap rates, etc. Sales comparables should be recent sales, rather than listings, since you don’t know what these listings will ultimately sell for. According to the graph in “American House Prices: Reality Check” in the Economist, we can see values rapidly changing over time. Generally, the trend in property values is upward sloping, but we can observe some sharp dips in economic downturns. Therefore, the more recent the sale of the comparable, the more accurate the data will be due to changing values over time. After finding the closest comparables, an adjustment must be made to the price for amenities, features, and physical attributes. Some of these factors include quality, condition, size (lot/building/rooms, age, views, # of bathrooms/bedrooms, backyard (pool) etc. Another method, used more in the commercial real estate field, is to find the cap rate the comparable properties have sold at and adjusting it to better fit your property. Then you will use this cap rate to find the value of your property using the income capitalization approach (NOI/cap rate=value). Some of the sources and websites listed below will have features to generate comparables and may have software to adjust and estimate the value for you!
When choosing the best “other” comparable properties, you will want to follow the same rules and guidelines mentioned above for sales comparables. The main difference is these do not require the comparable to be a recent sale, but a close comparable operating property. Typically, the best comparanles can be properties on the same block that are similar and operating in a similar fashion. You will want to know the most recent data possible of the property because of changing factors over time. Similar adjustments should be made to these other factors such as rents, expenses/expenditures, cap rates, etc. for differences in amenities, features, and physical attributes (size, etc.).
Warnings and Caveats
When searching for and using comparables, the researcher should be aware of some potential caveats that may alter the accuracy of your projections. First, you should always consider the source you are gathering data from and whether they have specific interests, capabilities, and bias. For example, Real Capital Analytics is in the “business of selling objective information for a wide variety of uses” (HBS, A Note). Free research reports may give useful data, but may be used as a marketing material. Also, the researcher should always check for footnotes or other explanations of the sources methodology in gathering and analyzing data (HBS, A Note). The researcher should always think about the reliability and accuracy of the information given. As a real estate broker, I have seen countless mistakes on the Multiple Listing Service and other listing websites such as wrong square feet, # of rooms, etc. We suggest using multiple of the sources below to access a wider range of data and increasing the accuracy of your projections.
Resources for Sales Comparables
Researching comparables is a lot different than researching most other topics in this book due to the amount of analysis that must be done or the involvement of a real estate professional such as a real estate agent/broker or appraiser. Nevertheless, there are various ways to research and find the best comparable properties to your property. An older method of finding comparables would be to go to your local County Clerk’s office or record room and get data on recent sales. Fortunately, there are easier and less time-consuming methods.
For the amateur, student, or investor/developer, there are many free websites where you can easily look up recently sold and listed properties. On these websites you will be able to search by specific categories or criteria such as neighborhood, property type, size, etc. Some residential, New York centralized (listings) websites include www.Zillow.com, www.trulia.com, www.streeteasy.com, www.redfin.com, and www.realtor.com. Each of these have their own “recently sold” tab that can be explored, but much analysis must be done to find the best comparables and to adjust them to an accurate value. The National Association of Real Estate’s website (www.nar.realtor) is another great resource for looking at recent sales data. Once a month (around the 25th of each month), the NAR Public Affairs office releases the latest existing home sales data along with an analysis by NAR’s Chief Economist, Lawrence Yun.
For the commercial side, www.loopnet.com can be used to view recent sales and actually has its own sales comp tab that will generate comps for you, but to get full access, a subscription is required. Another subscription website that can provide more then recent sales is www.propertyshark.com. It also has its own comparables tab and will generate a value for you along with detailed property data reports. Other subscription websites for commercial comparables include www.costar.com and www.rcaralytics.com. The core product offerings of these sites include detailed current and historical information on commercial properties, as well as market activity and forecasts (HBS, A Note). Another pay for property valuation site is www.realquest.com which contains data on nearby and comparable sales, detailed property reports, and more. Students may be able to gain free trial access to some of these websites and data sources and should look up these possibilities. Also, individual brokerage and sevice firm’s websites (such as Cushman and Wakefield, Jones Land Lasalle, CB Richard Ellis, etc.) are great sources for recent sales, property reports, and other real estate data. Smaller, local brokerage and service firm’s websites may also have data on recent sales and property reports, but may be limited to only deals they were involved with.
Another way to research sales comparables is to ask a local real estate agent/broker to put together some comparables and a Comparative Market Analysis (CMA). As this takes time, a real estate agent/broker will not want to do this for free and may require a serious buyer/seller/investor (where a commission may be made) or a small fee for their work. If you are able to use their services, a more accurate projection may be made due to their knowledge, expertise, and ability to use certain websites or software that the general public does not have the right to use. A major example of this is www.mls.com or the Multiple Listing Service which not only contains a database of listed, pending sales, and sold properties, but aids the agent/broker in completing a detailed CMA.
If you are a Baruch student, you have access to various databases and sources through the William and Anita Newman Library. Free access is available to www.propertyshark.com and www.realquest.com by asking for login information at the reference desk and may only be used on-site, in the Baruch Library. Other great databases offered include Factiva, Business Source Complete, ABI/INFORM Global, etc. which all include real estate news and financial information taken from various articles, magazines, trade journals, newspapers and scholarly journals. Also, do not shy away from asking the librarian for additional sources or databases that may fit what you are looking for.
Resources for “Other” Comparables
Earlier in this book we went through methods for researching various factors such as rents, expenses/expenditures, other income, vacancies, financials, growth and cap rates, relativity to the competition, etc. Finding other comparable properties is just one method of researching and projecting these factors, but is a common and powerful tool. As mentioned earlier, any similar operating property (not necessarily recently sold) can be a great comparable for your property as long as you can obtain recent data.
Just as with sales comparables, there are plenty of websites to check for comparable operating properties and data on these factors. Most of the free listing websites mentioned in the previous section can be useful in identifying other comparable properties, but typically do not have much data or information on specific properties financials and rates.
Along with the features mentioned in the previous section, www.propertyshark.com (residential and commercial) has a huge real estate data source that contains data on sales history, specific property characteristics, detailed property data reports, and more. Also, www.costar.com and www.rcaralytics.com give commercial comparables reports and track and provide valuable data on cap rates, costs per square foot, competitive properties, rent/lease rates, and more. www.realquest.com and www.loopnet.com are other sites that provide specific property data and property reports on a given property. The websites mentioned above require a subscription, but a free trial may be available for students and should be looked into.
Major real estate brokerage and service firms such as CB Richard Ellis, Jones Land Lasalle, Cushman and Wakefield, etc. are some of the most commonly used and accessible real estate sources. These firms create and offer regular reports tracking rental rates, vacancy, absorption, and transaction activity for different product types in various markets across the world (HBS, A Note). Usually there is a research tab that will provide these free reports and data.
Since a recent sale is not a requirement for these types of comparable properties, it can be best to look at a similar operating property on the same block or around the block from your chosen property. Word of mouth and conducting interviews can be a prime way to gather more information than what can be found on the websites and sources listed above. The property owner would be the best person to interview and ask questions since they will have the most knowledge on the property, but they do not always want to give up all their information as you may be a potential competitor. The property owner may be willing to share rent/lease rates, what cap rate he bought the property at, expenses/ expense ratio, maintenance and capital expenditures, costs per square foot, etc. A call as a perspective tenant can get you some information on rents (and any concessions or offers), vacancy, and turnover. Interviews with tenants can easily get you data on rent/lease rates and amenities offered, as well as how the property is operated. Interviews with the property manager or the property management company can also reveal specific information on the property such as vacancy rates, turnover, rent/lease rates, maintenance/expenses/expenditures, etc. Also, your local real estate agent/broker may have some property specific information and other useful data that may be worth the time to call and ask.
As mentioned in the previous section, if you are a Baruch College student, you will have free access to various databases and websites. Free access is given to www.propertyshark.com and www.realquest.com when using them within in Baruch Library. Free access is also granted to other databases such as Factiva, Business Source Complete, ABI/INFORM Global, etc. which include real estate news, articles, financial information, etc. Do not be afraid to ask the librarian for additional sources or databases that may have the information you are looking for.