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In the world of real estate, determining the value of properties is a process that requires a keen understanding of the market and the factors that influence property prices. One of the most debated topics among real estate professionals is the use of price as a criterion for searching comparables. With over a decade of experience and countless discussions with real estate professionals, we're diving deep into this contentious topic. This blog post dives into when and why you should or shouldn't use price to search for comparables.
The Case Against Using Price for Searching Comparables
Why It's Generally a Bad Idea
The primary concern with using price as a search criterion is the risk of missing out on relevant properties. Appraisers, who are tasked with finding comparables for appraisal reports, typically avoid using price to prevent bias in their analysis. They opt for other criteria such as square footage, location, bedroom and bathroom count, or even features like garage count or the age of the property. The rationale behind this approach is to ensure a broad and unbiased search that captures a wide range of potential comparables.
Real estate agents might feel inclined to set price ranges when searching for properties for clients based on their specified budgets. However, when it comes to performing a Comparative Market Analysis (CMA) or valuing a property for listing or making an offer, the focus shifts. The goal is to identify comparables that accurately reflect the value of a property, necessitating a wider lens than just the price.
The Pitfalls of Narrow Price Ranges
Narrow price ranges can lead to significant oversights. For instance, if you're selling a home for $500,000 and limit your comparables search to the $490,000 to $510,000 range, you might miss out on comparables that could influence your valuation. Expanding your criteria beyond price allows for a more comprehensive analysis that can lead to more accurate and reflective pricing.
When Using Price Makes Sense
Excluding Extreme Outliers
Despite the general advice against using price, there are circumstances where it can be beneficial, particularly for excluding outliers. When your search results include properties that are vastly different in price but meet other criteria, setting an upper or lower price limit can help focus your analysis on comparables that are truly relevant.
For example, if you're evaluating properties in a specific area with features that typically range from $400,000 to $550,000, but there are outliers priced significantly higher or lower, using price as a filter can streamline your search. This approach ensures that the properties considered for your analysis are within a realistic price range, avoiding the distortion of your valuation by extreme outliers.
Conclusion: Balancing Precision and Pragmatism
In conclusion, while price should not be the primary criterion for searching comparables, there are strategic instances where it can be utilized to refine your search. The key is to balance precision in your criteria with the pragmatism of excluding non-relevant outliers. This approach allows real estate professionals to craft more accurate and market-reflective valuations, ultimately benefiting both sellers and buyers.
Stay tuned to our blog for more insights and strategies designed to empower your real estate practice. Whether you're refining your valuation techniques or seeking to broaden your market knowledge, we're here to support your journey towards becoming a more effective and insightful professional.