What Are Comparables?
Comparables or Comps are used as relative valuation technique where the parties who intend to sell, buy, or fix an asset compare it with the value of similar or recently sold assets. It is otherwise known as comps. The evaluation helps in establishing a property’s potential price.
Pricing data is important in revealing information about the item or property sold. The data reveals current market trends, growth, market conditions, and expectations about their future scale of development. These valuations form the foundation of future financial transactions. It also helps individuals or companies plan the method of funding that purchase.
Table of contents
- Comparables or comps are assets or properties that help determine the fair value of a similar asset. They are widely used in the valuation of real estate properties.
- The value of properties depends on the sector to which the asset belongs, the location, the area it covers, amenities offered, and the value of a recent sale in that location.
- The seller and the buyer benefit from it because it aids the seller in accurately pricing the property and shields the buyer from fraud and inflated costs. Moreover, if the buyer wishes to buy soon, it also assists them in planning.
Comparables In Real Estate Explained
Comparables in the real estate sector are the value of properties sold in the recent past (within a year) with the same characteristics, location, or size as the property at hand. The three major types of properties commonly taken for the valuation process are:
- Residential properties: The primary use of residential properties is for living purposes, such as single-family homes, apartments, and townhomes.
- Commercial properties: Commercial properties primarily sought to be rented out and profited from. For example, office spaces, shopping malls, centers, etc.
- Industrial properties: The use of industrial properties is big industrial activities such as manufacturing, production, etc. Examples include power plants, factories and production units, and warehouses.
Evaluating the factors influencing prices can help arrive at an estimate of the properties’ potential prices. But first, let us look at each property type in detail:
- Residential properties: The property’s value increases depending on the amenities in and around the area. Similarly, the number of rooms or stories in a building can increase or decrease its value. Sometimes, a neighborhood with high-net-worth individuals, such as celebrities, is likely to influence prices in the surrounding area. Certain factors, such as views, also influence prices. For example, there may be two similar apartments, but if one faces the sea, it achieves the tag as a sea view apartment and retail for a higher value.
- Commercial properties: Rent or property value again depends on the facilities available in and around the area. If the area is a technological hub, the value of the spaces will skyrocket depending on the size of the property. This is because all the amenities required for that industry will already be available there.
- Industrial properties: For industrial properties, this particular fraction might look out for amenities that suit their needs. For example, a coal mining company would want a place near a coal mine where water is available nearby for coke smelting, etc. Having amenities nearby will significantly reduce transportation charges for the business, thus increasing its profits. As a result, spaces with such characteristics have increased values.
Factors Affecting Property Cost
The cost of the property also depends upon other factors, such as replacement cost, depreciation, etc. Similarly, one needs to scrutinize the values obtained through comparables analysis too. Analyzers need to check if there were distressed sales because of government action or fraud if the previous value sold was below market value, etc. They also need to examine the quality and age of the property. The real estate comparables tool is often beneficial in determining the above values.
Examples of Comps
Check out these examples to get a better idea of real estate comparables:
Bob is a house owner who wants to sell his house. Although he wanted to sell it for $500,000, no buyers approached him. So he decided to investigate, used a real estate comparables tool, and found out that the neighboring houses were sold for a much lesser price, about $250,000, which is almost half what he quoted.
Since buyers know the market value there, they ignore the sale offer. To make it fair and increase his chance of sales, he can now reduce the price near market value or advertise justifying the high prices.
Daisy wants to buy a house. First, however, she has to manage her finances to be able to purchase it in a few months. So the first thing she did was ask the neighboring areas how much house retail here is for. Then, with the past year’s data, she concluded the property’s price in that area.
Daisy even collected data on how prices increased over the years to decide on the growth prospects of that area. This helped her in estimating the price change that might be happening in the future and that it was a good investment due to the growth rate. Then, with the values in hand, she charted a plan to fund it through financial sources and bought the house a few months after.
Comparables provide a basic insight into the prevailing market prices. Here are some of the key benefits of comparables:
- They indicate the trend in the market, i.e., whether the prices are inflated or less than market prices.
- High prices can be an indicator of a well-developed neighborhood. It may also indicate the level of security a place has. Places that can provide a good quality of life have a high price.
- For a seller, it helps in pricing the property appropriately, and for a buyer, it prevents them from falling prey to scams and inflated prices. It also helps buyers to plan if they want to buy shortly.
Comparables analysis is helpful in various fields. One example is salary comparables. Salary paid to other employees in the market, regardless of position, is termed salary comparables. This prevents candidates from being exploited. Comparables company analysis is another example. Comparables company analysis is related to buying and selling decisions of companies. The evaluations of companies are technical and are found out through methods such as income and cost, etc.
Frequently Asked Questions (FAQs)
In the real estate sector, comparables indicate past sales prices and the value of prices of assets sold earlier that year or assets with similar characteristics to the one at hand. Sellers and buyers can find comps with the help of local comp websites or valuation tools or by simply talking with reputed real estate agents.
Trading comparables are especially helpful since they help to determine if a publicly traded company is overvalued or undervalued compared to its competitors. It reveals its financial strengths and weaknesses. In addition, trading multiples can be determined for any period the company trades publicly and helps investors make informed decisions.
Comparative analysis is done differently according to sectors. Various methods, such as income and cost, are used to compare companies. By utilizing the metrics of comparable companies in the same industry, the worth of a company can be determined.
This article has been a guide to What are Comparables (Comps) and its meaning. Here, we explain comparables in real estate, their benefits, and examples. You can also go through our recommended articles on corporate finance –