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John Souerbry's Blog

By John Souerbry | Broker in Palo Alto, CA

Real Estate Jargon: “Breaking Comps” – Estimating Value In Changing Markets

Real Estate Jargon: “Breaking Comps” – Estimating Value In Changing MarketsBuyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of not-so-common real estate terms.  Today, we’re going to discuss a term that’s used a lot by real estate brokers, appraisers and lenders when property values are going through periods of significant change:  “breaking comps.”

It’s been said that there is one prediction that can be made with 100% certainty regarding the future of the real estate market, the stock market, the commodities market – any free market involving buyers and sellers.  That prediction is:  the market will fluctuate.

What happens when a local real estate market rises and we want to offer a property for sale at the highest price that market can support?  In classical valuation theory, we shouldn’t value a property any higher than comparable properties that have sold recently in the neighborhood.  Sure, if our property is bigger, newer and has more bedrooms, bathrooms, or parking spaces in the garage than comparable properties that sold recently, it’s easy to assign values to those differences and come up with a higher value.  But what happens when market conditions make that extra bedroom worth a $50,000 value adjustment today, when that adjustment was $35,000 six months ago?  If our property is the first one to go on the market with a higher value under these new conditions, we will be “breaking comps”!  In other words, we are estimating a property value based upon not just recent, comparable sales with reasonable adjustments, but also based upon recent changes in market conditions that have not yet been reflected in other sales in the neighborhood.

Factors that could increase values ahead of comparable sales might include:

· Significant decreases in the cost of mortgage borrowing (lower fees or interest rates)

· Local employers expanding their workforce

· Decrease in inventory of homes for sale

· An announcement that the local public schools are now the best in the country

· Opening of a new expressway or rail line that cuts commute times in half

· Jennifer Anniston just purchased the house two doors down

· Etc., etc., etc.

While it’s easy for sellers to break comps simply by asking for a higher price, buyers must rely upon their mortgage lender’s appraiser to justify the higher price as a basis for the purchase loan.  As market conditions push prices up, appraisers are faced with increasingly-complex approaches to justifying values that break comps.  As sellers, we can help to support our asking price by including selling points and information in the MLS listing that directs the appraiser towards additional factors that justify breaking comps.

Don’t be afraid to break comps.  Even if Jennifer Anniston never actually shows up at her new house, someone has to drive up comparable sales prices in your neighborhood – might as well be you!

I hope you found this information helpful.  If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line!  john@jsrealproperty.com

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John A. Souerbry & Associates (DRE 01370983)

Comments

By Ken Allen,  Sun Mar 3 2013, 10:07
Thanks for some interesting iinformation.

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