Comps that are Wrong, Unsuitable or Missing Could Affect Valuation Accuracy
Comps (short for comparable sales) used by the property valuer that are wrong or unsuitable are the first key factor that can affect valuation accuracy. Even worse, excluding or missing relevant comps could lead to more than inaccuracy in the value outcome, it could be a case of negligence by the property valuer.
In real estate terminology, "comps," are those sold properties that are similar to the subject property being valued in terms of its size, age, location, condition and features.
Comps are used as benchmarks to ascertain a property's fair market value. Vendors and real estate agents frequently utilise comparable sales to establish an estimated selling price (ESP) for a property. These comparables are also utilised by purchasers and property valuers to assess the value of a property.
In an ideal situation, comparable sales would be 100% similar to the subject property in all respects. However, in reality, due to various factors, no two properties are exactly comparable (e.g. the land size and shape, the location of the property, the area and condition of the building, etc).
However, comps may be sufficiently similar to the subject property to be of use as a valuation tool for assessing value. The following are some of the important characteristics that have to be present while looking for comparable sales for a subject property:
(1) Properties that have recently sold
The comparables must have sold within the last three to 12 months, depending on the location and nature of the property (with preference being given to the most recent sales), under normal market conditions in order for the comparable properties to be valid. The most recent sales are typically given preference, however this is not always the case. For specialised properties and properties with limited sales transactions, sales beyond 12 months (or even up to three years in some cases) may be used as comps.
(2) Comps in close by locations
In general, each comparable sale should be as close as possible to the subject property. In an urban area, comps should be found in the same or nearby neighbourhoods (if the competing neighbourhoods offer the best possible comps). Comps should be no more than one kilometre from the subject property in an established or fully developed area, but they can be much further (even up to 10 kilometres or more) in rural or country areas if they serve as the best indicators for valuing the subject property. In such cases, the property valuer must use their local expertise and sound judgement. The valuer must explain how and why the specific comps were chosen.
(3) With similar location attributes
A property located along a busy highway is not suitable as a comp for a subject property in a quiet street. Other similar location attributes include a good school zone, a master-planned estate, neighbourhood character, floor level (for apartments), with or without own street frontage, proximity to facilities, etc.
(4) Same property type
Comps must be of the same type, that is, comparing apples with apples. For example, if the subject property is a townhouse the comps should all be townhouses. The sale of a freestanding home is not a suitable comp.
(5) Comps of similar size
Comps should be of similar building area in square metres and have the same number of bedrooms and bathrooms as the subject property. Also, for landed properties, the land size and to a lesser degree, its shape should be similar.
(6) Similar features
Comparables should have features that are quite alike. Features are what a property has such as number of bathrooms, an alfresco deck, a swimming pool, height of ceiling, type of kitchen benchtop, water views, etc.
(7) Similar condition
A property that needs work would probably not be a good comparison for one that has recently undergone renovations.
Arm's length transaction
When the buyer and seller have no prior ties to one another, the transaction is said to be arm's length. The price of the property might not accurately reflect the open market price, for instance, if the sale of a potential comparable sale was a transaction between family member or related business entities (rendering it a non-market sale). A comp must be carried out between unrelated parties.