In real estate, a comp is an abbreviation of the phrase "comparable sale." Generally speaking, a comp is a recently sold property in the same area with similar characteristics to your home or a home you're looking to buy.
The keyword here is "recently." The main purpose of using house comps is to determine what a particular house might sell for in today's real estate market. By using homes that have sold within the past few months, you can get an accurate idea of how much buyers are willing to pay for homes in your market.
A comp doesn't necessarily need to be the same as your house in every way. Comps can have significantly different square footage and lot sizes, and can even be in very different condition than your house. The most important things are the proximity to the house you're thinking of buying or selling and the time that's passed since it's sold.
Why house comps matter to you
Whether you're in the process of buying or selling a home, it's important to understand house comps and what they're used for. With that in mind, here's a rundown of why comps matter to buyers and sellers of real estate.
Why house comps matter to buyers
There are a couple of main reasons why house comps matter when you're buying a home. For one thing, looking at comps can help you determine a fair offer. Here's a simplified example. Let's say you want to make an offer on a home and two similar homes in the same neighborhood recently sold for $200,000 and $205,000. You may want to make an offer that's slightly less than these with the expectation that you'll end up paying something in this range.
House comps also matter in the buying process when it comes to financing. When you apply for a mortgage, your lender will typically order an appraisal before approving your loan. The reason is that lenders want to protect themselves -- they aren't willing to make a loan if you're overpaying for a home. If things go badly and you stop making payments, the bank gets stuck with the house.
Appraisers use a few methods when it comes to determining the value of your home, but a major component involves analyzing comps in the area. When I recently had an appraisal done on a rental property, the appraiser used three comparable sales in the same neighborhood as a basis for calculating its value.
Why house comps matter to sellers
Every real estate agent I've ever spoken with has told me one of the biggest issues they run into with home sellers is unrealistic expectations of what a home will sell for. To be fair, it's difficult to make a rational assessment of the value of something you have an emotional attachment to.
Using comps can help you get a realistic idea of what your house will sell for. If you're working with an agent, they'll likely pull some recent comps and suggest a listing price. This is known as comparative market analysis, or CMA. If you're selling your home on your own, or you haven't started the selling process, look at a few comps on your own. They can help you determine what you can expect to get for your home before you list it on the market.
It's tough to overstate the importance of coming up with a realistic price for your home. Pricing your home according to the comps in the area as opposed to what you think you "should" get for it can make the difference between a quick sale and your house sitting on the market for several months or longer.