Comparing Honey Crisps to Braeburns
One of the more quizzical looks Realtors get is when they (try to) explain to a prospective home Seller that their neighbor’s house isn’t a “Comp” (Comparable Sold Property).
In plain English: it isn’t relevant — at least directly — for pricing their home.
For the uninitiated, a Comp is one of the three homes Realtors and appraisers use to determine fair market value; once the relevant Comp’s are identified, step #2 is to go through a formal “compare-and-contrast” process between the subject home and each of the Comp’s called a “CMA” (Comparative Market Analysis).
So, why doesn’t the neighbor’s house make the cut?
Because one (or more) of the following usually apply:
One. Timing. Specifically, it sold too far back.
To be a Comp, the sale must be within the last six months.
Two. The neighbor’s house has yet to sell — that is, it’s “Active” or “Pending.”
While a neighboring home that is currently for sale may very well compete with another house on the block, because there’s no established sales price yet, by definition, it’s not a Comp.
Three. The neighboring home is too different.
As I like to put it, “you can compare a Honey Crisp apple to a Braeburn apple . . . but not to an orange.”
In non-layman’s terms, the maximum adjustment allowed between the subject home and the Comp is about 20%.
Beyond that, the adjustments become so big that they become unreliable.
So, if the neighboring home is significantly bigger or smaller; in dramatically different condition; or a completely different housing style — it doesn’t qualify.
Bad — and Good — Apples
None of the foregoing is to say that the value of neighboring homes doesn’t affect yours.
Thankfully, at least in real estate, one bad apple seldom spoils the bunch — it takes a couple of bad apples to do that.
However, once multiple foreclosures or derelict properties appear on a block, they pull down values — whether they’re Comp’s or not.
Conversely, if the neighborhood is clearly on the upswing, that can be very helpful.
But strictly for the purposes of determining a list price for a specific home, a neighboring home that’s too different or sold too far back isn’t one of the three homes that go into the CMA.
See also, “Bracketing, Explained.”