The easiest way to explain the myth of comps is though the use of a baseball metaphor. Suppose you are a team manager and you have to decide who to play at a particular position. You have two candidates, both of whom have 50 hits. Player A amassed his 50 hits in 100 at-bats, but player B required 200 at-bats to do the same. Who do you play? Player A of course, because his batting average is twice as high as player B’s.
Now, here’s the connection to comps. A Realtor shows you 3 comps of recently sold homes in your town that match your home pretty well. Based upon those comps you determine that there is a market for your home at the price those recently sold homes sold for and off you go. However, here’s what you don’t know:
(1) You don’t know the total number of listings that were on the market in your house’s price point range during the time that the comps sold. For example, you were shown 3 comps. In a best-case scenario there were only 3 listings in the entire price point and all of them sold. In baseball terms that means batting a thousand…getting a hit every time you come up to bat. But what if there were 20 listings in the price point and only 3 sold? That’s a much different matter.
(2) You also don’t know how many of the listings in the price point expired. Using expired listings to inform a sales and marketing strategy is controversial, because some people think that an expired listing indicates that the seller wasn’t really interested in selling. That’s wrong, and the proof of it being wrong is that in towns where there is a great deal of buyer activity, there are relatively few expired listings. For example, here is a comparison of two towns in north Jersey:
In TOWN A there were 232 total listings during a recent 12 month period; 28% of the listings expired. In TOWN B there were 196 total listings, but only 21% expired. Are we to believe that TOWN A’s homeowners (where there were more expired listings) didn’t want to sell every bit as much as TOWN B’s? Moreover, 51% of total listings sold in TOWN B, while only 33% sold in TOWN A. It is very clear that houses in TOWN B were in greater demand than houses in TOWN A. That affects prices that houses sell at and the number of days it takes to sell.
So, does that mean that doing comps is a waste of time? Not at all. But it does mean that comps exist in a market context that needs to be fully understood. That’s why I developed Hyperlocal Market Analysis. I use it to get the best deal for both buyer and seller clients. Call me at 973-865-1863 to find out more about how Hyperlocal Market Analysis can help you make a better real estate deal.