Imagine a new sale in the neighborhood. This property sells above all others, and now it’s a comp, right? Well, not necessarily. I had a neighbor ask me about this after a sale was reported to have closed surprisingly high, and I had a related conversation with someone alleging investor fraud from inflated comps. Let’s talk about it.
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ONE SALE DOESN’T CHANGE EVERYTHING
I get the concept that one new higher sale can pull up the rest of the market, but just because it closed doesn’t mean it’s a good reflection of value. In other words, a lofty sale doesn’t automatically change buyer behavior, pull up the rest of the market, or reflect actual value.
WHAT IF I SOLD MY HOUSE FOR ONE DOLLAR?
Imagine if I sold my house for $1. Does that mean the rest of the market will bend toward my sale? Nope. The same holds true if I sold my house for 25% over market value. This “lone ranger” sale doesn’t become the new comp for the rest of the neighborhood. The big truth here is just because someone overpaid or underpaid doesn’t mean it reflects the market.
BRO, BIG INVESTORS ARE CREATING HIGHER COMPS
On a related note, I talked with someone recently about investment fund activity. The alleged scenario was that a big investor purchased an entire neighborhood at a discount, and then sold three homes at an inflated level to an LLC that was owned by the same investor. The idea is these new higher “comps” will now be used as the value basis for other properties. Look, I get the idea, but there are some issues here:
1) Buyers aren’t stupid: Buyers don’t automatically consider higher sales as comps (see Zillow example below). In other words, buyers are discerning, and they aren’t going to arbitrarily accept a high sale as a new level of market value if that’s not what the data suggests. By the way, I’m not saying fraud cannot exist or that buyers don’t sometimes pay bonehead prices.
2) Private comps are rarely ever used: Appraisers rarely use private sales as comps, and they shouldn’t be turning a blind eye to why one “comp” sold so much higher. In fact, appraisers almost always steer clear of using private residential sales at all unless they can verify the details of the transaction. For instance, I wouldn’t blindly use a private sale that closed at $800,000 when all other public comps on MLS closed around $700,000. What if the one $800,000 sale included a car in the garage and fat concessions that boosted the price? One more thing. Appraisers and agents might not literally even know about private sales off MLS unless doing a deeper search of sales through tax records instead of MLS.
3) Is this fake news, or did it happen? Did this scenario actually happen in a real place, or is it just an anecdote for social media to get clicks? If it’s real, let’s look at the neighborhood and explore whether other buyers ended up paying more for homes by relying on the higher “comps.” Look, I’m not an investor fanboy here at all, and fraud should be exposed, but I find there are often unsubstantiated claims like this that ignore how comps work in a marketplace. I’m not saying investors get a pass at all, but I think they’re an easy target to blame our disappointment about a lack of affordability. In short, if this is real, speak up in the comments about locations and proof of fraud. Thanks.
4) Zillow did not create higher comps: This reminds me about supposed fraud when Zillow was an iBuyer. There was a viral accusation on TikTok in 2021 that Zillow overpaid to create new higher comps. However, Zillow was buying so many homes off-market, so appraisers and everyone else wouldn’t even be using those private sales as comps. Yet, when Zillow did overpay on MLS, those higher “comps” weren’t pulling up the rest of the market. The truth is buyers don’t care what a seller paid, which is why buyers were regularly getting into contract below Zillow’s acquisition price. So, actual market activity refuted this viral claim. Again, I’m not speaking from the perspective of a big investor or Zillow fanboy, so save your hate mail. Let’s critique examples like this and figure out where to direct our disappointment.
THE BIG TAKEAWAY: WE NEED TO WEIGH THE COMPS
Here’s the big takeaway. Is the new sale a comp? Does the property reflect what actual buyers are willing to pay? Was the price too high, too low, or just about right? In real estate, we have to weigh the comps by asking questions like this. We don’t just arbitrarily accept a closed sale as gospel. I find many sellers believe this to be true when a sale closes really high, but then they don’t believe it when something closes too low. So, maybe this is more about wishful thinking. Ultimately, if it looks like it closed too high or low, then we might not use the sale at all, or maybe we won’t give it much weight in our final opinion of value (rightly so).
If a sale looks out of sync with value, it’s time to ask some questions. Was it a desperate buyer needing to quickly complete a 1031 Exchange? Could it have been an out-of-town buyer who didn’t know the market? What if someone was purchasing next to an aging parent and paid more to secure the deal? Was it a seller in distress that explains a lower price? Did the agent price it too low?
One of the realities of comp selection is we need to ask questions like this, and the answers can help us figure out if we need to give a “comp” more or less weight in our valuation. It’s almost like we are appraising the comps too rather than looking at nothing but the closed price with tunnel vision. What is the story behind the price? That’s the more interesting and relevant question when pulling comps and trying to figure out value.
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Questions: How do you weigh comps and understand if something sold for too much or too little? What stands out to you above?
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Good topic. I spend so much time these days sifting through sales to figure out what was truly a competitive sale.
Agents, if there’s anything unusual about a transaction, it would be wonderful if you could leave breadcrumbs in the MLS comments to help everyone understand that the sale price may not represent the market. I love seeing comments like “Motivated Seller”-it prompts me to pay attention to see if the sale was low or in line with the rest of the market.
Joe, I love the idea of clues (breadcrumbs). It seems like there is a pervasive belief online that closed sales carry some sort of absolute power – as if we don’t have to consider whether the sale was legit or not. I had someone accuse me of perpetuating fake news by saying that we need to ask more questions. Classic. Ironically, we don’t view closed sales for anything else in a way that we would question the sales. Baseball cards, collectibles, buying a used or new car, etc… The final price of the “comp” may or may not be reflective of value.
As an appraiser, I find that most of the time, the market gets the price pretty close to right (especially for MLS sale). However, when I’m gridding comps and get an outlier sales comparable that can’t be explained after talking to parties to the transaction, it can be frustrating.
Yeah, I tend to agree. Thanks Gary. The market is really emotionally and feels crazy at times, but buyers tend to sniff out value pretty well in many cases.
I talk to sellers often about anomalies in the market. Basically, I tell them that some over market sales happen for reasons we may not see, such as their family might live very close by and they have been waiting for a house on that particular street, or they bought it for their daughter and her family to be walking distance so they can babysit after school. There are lots of reasons people over pay, but that does not make it the market price.
Thank you, George. Really good stuff. And sometimes we might not really even know why it sold the way it did. It’s nice to get an explanation, but sometimes it remains a mystery.
Here in East TX, we had a ‘maybe’ typical situation for those rural or not mainstream towns where for the most part property values were ‘flatish’ for known history. My new town(6 years now) is ~125,000 people and for known history the market rose at a tiny amount(300 active on market-higher than traditional inventory.
Thats data I can hand out to anyone who wants.
Thanks Mark. Love it. I always appreciate you pitching in.
But what if the listing agent underpriced the listing, either unintentionally or as a way to stimulate added interest? Not unusual in East Sac this year, for example.
Great question. I think the key here is where the price eventually lands. I’m not concerned about listings that price too high or too low. I’m mostly talking about what it closes at. That’s what we have to analyze when choosing comps. To your point, we have to be really careful not to judge a property based on the original price. I find this to be important for appraisers especially. If it went above asking, that’s no big deal. It happens all the time. That’s not the same thing as going above value though if the property was priced a little lower.
In portions of the Bay Area, it’s incredibly common to see properties sell above their original price. In fact, last month in San Francisco, properties went 6% over asking on average. That is an insane stat. For context, our highest ever in Sacramento County was closer to 5% in the thick of 2021 when the market went bananas. Yet, in SF it’s really about strategic underpricing rather than having a crazy market like we saw here in 2021. I may talk about that soon actually. I have the itch to write about it.
The biggest problem by far is appraisal waivers and or those sales that don’t go through the typical checks and balances of an appraisal, home inspection, etc. Often times the sales price is above market value and are cancer sales. Meaning, if you use A la mode appraisal software and thus get to see how many other times a sale has been used in a report by others you get to see the effect. With fewer sales compared to years past and thus a smaller pool of data, I’m in an environment (high population areas) where locally that single sale will get used dozens of times for refinancing assignments, new listings, etc. When that sale turns into dozens of sales, and those dozens get used dozens of times its a full-scale bakery of misinformation.
Seek the truth.
Good point, Bill. I’m so glad you brought this up. We have to be really discerning. And that’s interesting that you can see how many times the comp has been used. That could be sobering if it’s not a reasonable comp. Though there is nothing wrong with using a sale and not giving it as much weight. But then why use it though, right? Thanks for pitching this in.
Do you not use A la mode software? Contact them for details, but it seems every subject and or comp that gets used by an appraiser can be referenced by any future appraiser. Meaning, they will show you how many times the property has been used by appraisers they issue service to (going back 20+ years), and provide a visual (sales grid) of exactly how others have identified the property ($ adj. not shown). With my prior comment in mind, and in keeping track of say a subject property where they put more money down to offset a cut value (market value), you can see in real time how the cancer spreads.
Seek the truth.
Wild. I use a different software. I’m not a fan of it, but I also only do private work, so I just don’t have a need to switch. Maybe one of these days.
More related to your prior article about concessions, but with what I’ve discussed, keep in mind that if a comp has been used before and the prior appraiser did their job by the book (say call the agent for info) then the concession $ amount will be known.
Too often people see a high sale or listing and think, SEE SEE. Their realtor salts the mine doing just a CMA with an average sale price or price per sq ft but not taking into account utility, location, condition, etc