Don’t try this at home: analyzing comparables

The field-emission environmental scanning electron microscope (SEM) is a state-of-the-art instrument at the Environmental Molecular Sciences Laboratory (EMSL) that scientists use to examine aerosols and other samples. The samples can be studied using a field-emission source electron beam both in standard SEM and environmental modes of operation. (Flickr photo by EMSL)

Any seller can wish for a high price for the property about to be listed.

And any broker can guess at the right offering price.

That’s asking for trouble.

The truth is, as many readers know, neither a next-door neighbor’s gossip nor borough-wide statistics is the best source of information from which an effective price can be set.

Contract prices of comparative (or, as they sometimes are called, competitive) sales are essential for gauging the right offering price (and, for that matter, bid).  As appraisal executive Jonathan Miller nicely defines the term,

[a] ‘comparable sale’ is a sale that would be considered an alternative choice to a buyer that might purchase the subject property.

The problem is finding and assessing good comps, where lurks the wily devil of critical details.  And the details are numerous, including such matters as floor level, condition, building quality, precise location, renovations, number of baths and bedrooms, layout and views, among many other variables.

Seasonality affects price.  So do the market environment when seller and buyer came to a meeting of the minds, stock market trends, consumer confidence, levels of inventory, mortgage rates, crime rates, levels of Wall Street bonuses, political considerations and so on.

How healthy was the market then and now, balanced or favoring buyers or sellers?

Whether a property closed last month but went to contract six months earlier or the parties signed last week makes a huge difference.

As data maven Noah Rosenblatt at UrbanDigs.com has pointed out, many real estate brokers will focus on the most recent sale rather than on the most relevant one.  The most relevant one requires the extra work of applying a formula to account for market dynamics and thereby adjust that property’s price.  He puts it this way:

Now, I understand that some subject properties don’t have enough in-building sales data to provide a relevant comp for any analysis. But my issue is when there is enough data, yet the broker or the consumer chooses to ignore it and focus on “recent non-relevant sales” instead.

In the best of all worlds, the most relevant property sale is not only the most similar in every respect but also is the most recent one.  In a residential building, it would be the identical unit one floor above or below the apartment to be listed and would have gone to contract a week earlier.  (Friendly brokers involved in the transaction might at least broadly hint at the sale price.)

But, as Miller notes, one sale does not make a credible comp.  Any number of factors could have affected the price — whether the adjacent unit owner purchased the place to effect a combination, someone died in the apartment or, for instance, the owner was financially distressed and needed to sell quickly.

So, it is not enough for the comparables to be nearly alike and close in time: Their buyers and sellers ideally will have been similar as well.

Both sellers and buyers easily can scope out comparables.  What they cannot easily do, however, it put them into a context that takes into account all of their complexities.

As a real estate broker, I can be expected to argue — and I do here — that the average consumer cannot evaluate all the distinctions necessary to arrive at the best conclusions.

At the same time, I freely acknowledge that analyzing comps is not the same as electron microscopy.  If the market is changing all the time, an understanding of its contradictions and changes adds value to knowing what prices mean and what properties can command.

I haven’t the slightest idea what to make of oil futures, and I wouldn’t expect the ordinary consumer to appreciate fully where the housing market stands relative to a single property or a collection of comparables.

Science, it is not, but I feel certain that pricing a listing correctly and making an intelligent offer rests on a depth of knowledge that only an individual working day in and out in the housing market can possess.

No matter what comps are selected, the fact remains that making sense of them depends less on precise measurement than on the experience of either the seller’s or buyer’s representatives.  In my humble opinion, woe to those who ignore their advice.

Tomorrow: Show-offs

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

Malcolm@ServiceYouCanTrust.com
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