What you’ll learn:
- What a comp is and how it impacts home value
- How comps can build your equity
- How to use comps to choose home projects
- How many home sales your neighborhood can support
When considering the value of your home, you may think it’s determined by square footage, lot size, neighborhood, and your home’s condition. And you’d be right — those are all important factors. But you’d be overlooking another key piece of the puzzle: Nearby home sales, which have a significant impact on your home’s value.
Think of it this way. The number one rule in real estate is, after all, location, location, location. Local amenities, like access to public transport, shopping, restaurants, and parks can make a big difference in your home’s value. But when the time comes to sell, potential buyers will also pay close attention to nearby home sales when deciding whether your home is worth the asking price for the area.
Even if you’re not selling, comparable home sales affect your home’s value, which can in turn influence your equity. Here, we’ll explain how to assess nearby home sales and why they’re important. Plus we’ll share some tips on how to use recent home sales to choose renovations that will earn you the best return on your investment. Let’s dive in!
What are comps and how do they affect home value?
The sale price of comparable homes in your neighborhood helps determine how much your home could likely sell for — in other words, the value of your home.
- Comps, short for comparables, are recently sold homes in your neighborhood that are similar to your home in size, condition, quality, and features.
As the value of comps goes up (or down), so too does the value of your home. Real estate agents and the buyers they represent use comps to determine their offering price. And mortgage lenders use comps to appraise a home’s value and determine how much they’re willing to lend you.
So what qualifies as a comp? It should be a lot like your home. For example, a comp and your home would have the same or similar:
- Square footage
- Lot size
- Number of bedrooms
- Number of bathrooms
- Special features or amenities (such as a pool or marble countertops)
When considering comps, you should look at the last 90 days of sales. This offers the most accurate information and is what a lender or appraiser would look at when determining your home value. However, housing markets don’t always move fast enough to provide sufficient comparable sales within that three-month window. If this is the case in your area, you can look at sales from the past six to 12 months. But beware of looking at comps that are more than a year old. These home sales won’t give you an accurate sense of your own current home value.
A real estate agent can provide you with relevant comps. But if you’re not currently thinking about selling, you can also use Realm to see how comps are impacting your home value. Realm uses 600+ data points — including comparable home sales in your area — to analyze your home. Using comp data ensures that your home’s current and potential value reflect an honest review of your local market.
- Realm tip: While it’s exciting to know that higher priced comps can have a positive influence on your own home’s value, there’s something else to consider: property taxes. Depending on where you live and the local tax codes, if your home’s assessed value goes up, your annual property taxes may also increase. Some states have property tax caps or limits, so the amount your taxes could rise varies from place to place.
See how comps impact your home's current value
How comps can build your equity
If you’re planning to sell, comps give you a real-time sense of how much someone might be willing to pay for your home. But comps are important even if you’re not selling your home. Why? Because their impact on your home value can influence your equity — and that equity can be a very powerful financial tool, especially if you’re planning to invest in upgrades or renovations.
So how do comps affect your equity? Well, the first thing to remember is:
Equity = current value of your home - amount you owe
Assuming your outstanding mortgage balance remains the same, if increased comp sale prices push up your home value, your equity rises too.
Let’s look at an example. Imagine you bought your home for $200,000 and have an outstanding loan balance of $150,000. This is what your equity looks like:
Equity = $200,000 - $150,000 = $50,000
Now imagine that comps in your area start selling for $220,000 and your Realm dashboard shows that your home value has increased to that amount as well. Here’s what your equity looks like now:
Equity = $220,000 - $150,000 = $70,000
Your increased home value has given you an additional $20,000 of equity.
So why is this increased equity important for renovations? When budgeting for home projects, you have different options to finance your plans. You could use cash savings. But you might instead opt to borrow from the equity you’ve built in your home. For example, you might consider financing your renovation with a home equity line of credit (HELOC), which is a revolving line of credit that taps into your equity to give you access to funds. Your home acts as collateral, just as it does when you get a mortgage. The more equity you have, the more funds you’ll have to access. And there are other financing tools, like home equity loans and cash-out refinances, that also use equity to pay for your projects. Each of these financing tools comes with its own benefits and drawbacks, but having more equity gives you the ability to choose the right option for your situation.
Using comps to choose home projects
Sometimes you decide to upgrade or renovate your home because you want to make your space more livable and comfortable. But if you’re thinking about how to recoup the money you invest on a renovation, the features of homes selling in your neighborhood are an important indicator of what types of home improvements will be most valuable for your home. You want to ensure your home ticks as many boxes as the average home in your neighborhood — not much more or less. And reviewing home sales in your neighborhood is a great way to understand what features add value to a sale.
If you’re planning to spend on home projects, whether by tapping into your equity or using your savings, it’s smart to know how much you may be able to recoup in added home value. When you review comps, you can see which features are fetching top dollar. As you look at nearby home sales, ask yourself:
- What amenities do these homes have that mine doesn’t?
- What features most appeal to me that these homes have but mine doesn’t?
- What are the most cost-effective projects I can take on, according to these homes?
For the last question, you can use your free Realm dashboard to create customized project plans and get accurate cost and ROI estimates. Using this tool makes it easy to understand which renovations are worth the investment — and even more importantly, which are not.
- Realm tip: As you might guess, you don’t want the worst home in the neighborhood. But you might be surprised to learn that you don’t want the nicest home in the neighborhood either. While high-end updates might be enjoyable, you can actually over-renovate your home. In reality, you won’t be able to get top dollar for luxury improvements unless your neighborhood real estate market can support those prices. Realm’s cost and ROI estimates factor in your local real estate market, so you can easily see how much you can expect to recoup on your renovations and make smart decisions about how much to spend.
Can you have too many home sales in your neighborhood?
There is a point at which a neighborhood could have too many homes on the market. But the reason behind the number of homes for sale truly matters. Consider this: 25% of a neighborhood’s homes are put up for sale after a major storm hits the area. This could indicate severe flooding damage to many homes or lasting issues with the neighborhood’s infrastructure.
On the other hand, a neighborhood could suddenly become a popular place to live. In other words, many buyers may be looking for homes in a neighborhood. This will push up prices and nudge other homeowners into selling because they want to take advantage of the market. To understand whether your neighborhood can support the number of homes for sale, you should consider:
- The strength of the neighborhood’s amenities. Local shops, restaurants, parks, and playgrounds. Empty storefronts or poorly maintained community areas make a neighborhood less appealing.
- The condition of homes on your block and surrounding areas. If your block is pristine but other areas are less so, you could be looking at a neighborhood in the middle of revitalization (or decline).
- The quality rating of your school district. Well-rated school districts will always be valuable to young families.
- The enrollment numbers in local school districts. Schools should ideally be growing or staying the same. Schools that are losing students can indicate a problem.
- The average time on market for homes in your area. If homes are selling fast, there likely isn’t an issue with the number of houses for sale.
As a final note, it rarely looks good for more homes to be listed for sale than not. Be sure to pay close attention to other indicators that could be influencing people to sell. If you’re concerned, you can chat to your neighbors about why they are selling. And you can always check your free Realm dashboard for up-to-date information about your home and neighborhood. As your neighborhood changes, so will your home value.
Published by Realm
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