Jonathan Miller on "What is a Comp"

Posted by urbandigs

Mon Mar 5th, 2012 02:50 PM

A: By now regular readers know that this is such a passionate topic for me, and its not because me and my programmers have been hard at work for almost a year on a unique Manhattan Comparable Sales tool - expected to go live in 6-8 weeks. The real reason why I care so much is that many brokers openly argue about "what is a comp"? The main debate lies between "relevancy" and "recency" of the comparable sale to the subject property. I admit, I did "pester" Jonathan to write on the topic because I value his opinion and his standing in the appraisal world is irrefutable. Lets get his take on what a comparable sale is, and take a quick peek at the real world and why "relevancy" should be the clear choice when markets are stable.

First lets define both "relevancy" and "recency" when it comes to picking out a comparable sale for an analysis of a subject property:

Relevancy - the comparable sales used are highly relevant to the features of the target unit. This tends to mean, the same building, the same line, the same layout or the same bedroom/bath size, the same exposures/views.

Recency - the comparable sales used are the most recent sales either in the building or nearby. This tends to be at the sacrifice of 'relevancy' as vertical housing markets like Manhattan rarely have highly relevant sales that are also very recent.

Now, in the appraisal world there are 3 types of markets: rising, declining, and stable. If the market is deemed stable for say a period of 2 years, then its OK to use a highly relevant comparable sale where an applied time adjustment is not too difficult to figure out.

It's only in rising or declining markets that brokers and consumers tend to sacrifice "relevancy" in order to focus on "recency" - probably due to the difficulty in adjusting for market changes over time. This is where I disagree completely, especially since we have the Streeteasy Repeat Condo Index to help us see market changes over time.

Before I continue lets take a look at Jonathan Miller's recent article, "What is a Comparable Sale":

The use of comparable sales are the basic ingredient for real estate appraisers and agents to vet out market value - so the similarity of it to the subject property (the property being valued) is paramount.

As an appraiser, I see the term "comparable sale" often abused. Some of it can be chalked up to inexperience and some of it to fraud. An illustrated deterioration of the slippery slope goes something like this:

Comparable Sale -> Sale -> Data -> Information -> Misinformation -> Fraud

A practical definition: A "comparable sale" is a sale that would be considered an alternative choice to a buyer that might purchase the subject property.

The sale should have a similar set of amenities (ie, size, condition, location, views, configuration, etc.) to be considered as an alternative choice for the buyer. However it gets tricky when the subject property is unique and there are few "comps" to use.

In real estate appraising, comparable sales are presented in the report and adjusted for their differences with the subject property (the one you are appraising). The more adjustments that are needed to be made, the less "comparable" the sale is.

In real estate brokerage, agents use "comps" to establish the market value of the potential listing and use the value to develop a pricing strategy (i.e. listings are not "comps" without considering some sort of listing discount).
I can't agree more about this one statement Jonathan makes in the article:
"The more adjustments that are needed to be made, the less "comparable" the sale is"
I have discussed comps analysis a number of times on this site and I often use the following statement as the focal point of those discussions: AS YOU INTRODUCE MORE VARIABLES, YOU DEGRADE THE QUALITY OF THE COMPARABLE SALES ANALYSIS

Exactly what JM is telling us as well. Now, I understand that some subject properties don't have enough in-building sales data to provide a relevant comp for any analysis. But my issue is when there is enough data, yet the broker or the consumer chooses to ignore it and focus on "recent non-relevant sales" instead.

I was on a REBNY panel recently where there were about 40 people in the room taking the CRA certification course when I asked this simple question:
"If the subject property is Unit 20A in a building w/ good sales data and you have three other A-line, same layout, same size sales that are 12mos, 18mos, and 24mos old respectively and then have a different sized 7G sale from 4 weeks ago, which sales would you rather use for the comps analysis?"
Almost everyone in the room said they would ignore the highly relevant A-line sales and focus on the most recent sale(s) in the building to analyze the subject property. That's when the little hairs on my spine started to stand up. Really? Lets just think about what we would need to adjust for by using the sale types in this example:

Adjustments for three A-line sales --> time, floor, renovations

Adjustments for recent G-line sale --> floor, renovations, size differences, utility of the different layout, differences in quality of exposure, differences in levels of natural sunlight, etc.

Which to you would have fewer adjustments? A G-line in the building may trade completely differently than an A-line for a number of reasons. We all know that's how vertical markets work - buyers value exposure, sunlight and quality of view very highly in this market! Why change all these variables when you don't have to!

Same unit sales are the best as we know exactly what somebody paid for the exact same property at a different point in time - no need for any floor adjustments or major differences in view quality. Simply adjust for time and renovations.

Lets look at a real-world example.

SUBJECT PROPERTY: 1349 Lexington Avenue, Unit 4G (was asking $1.2M, contract signed Oct-2011)
RECENT COMPS TO USE: 10E sale for $1.493M, 9E sale for $1.25M
RELEVANT COMPS TO USE: 2G sale for $950,000, 5G for $1.237M, Same unit sale for $1.2M

Which would you rather focus on? Recent sales or the relevant sales or the same unit sale?

In my mind, I would list the usefulness of these sales in this order:

1. the same unit resale - only adjust for time, looks like it was renovated already
2. 2G sale - adjust for lower floor (low floors are much harder sells) properly and reno
3. 5G sale - adjust for 1 floor higher and time, looks like it was fully renovated too

If you believe you should focus on the more recent E-line sales, I would ask you:

1. How do you quantify the value of a wood burning fireplace? The E-line has one, but the subject property does not
2. How do you quantify the value of the difference in exposure, view, and levels of sunlight?
3. How do you quantify the value of the difference in layout? And size?

You cant just ignore these differences and Im going to repeat one last time that Jonathan clearly states above, "the more adjustments that are needed to be made, the "less comparable" the sale is". And never forget we are talking about COMPARABLE SALES here! Not a simple building analysis.

Just looking at the 4G resale from peak at $1,200,000 (contract signed May 2007) is a great first start - how could you ignore this????

I would argue the market today in the $1m-$2m price point is down roughly 8%-10% from peak. But if your not sure, simply use the Streeteasy Repeat Condo Index to confirm a time adjustment:

Index on May 2007 when 4G was first signed into contract and sold --> 2.020
Index on Oct 2011 when 4G was most recently signed into contract --> 1.890
Market down 6.4% over this time period

We can go +-1.5% to get a 3% range and say the market change was approximately 5% to 8% over this time - very close to my gut feeling of down 8% to 10%.

If 4G sold for $1,200,000 in May 2007 at peak, then a negative time adjustment of $96,000 to $120,000 is probably where it will trade today - this is not an exact science so a 2%-3% range gives us some flexibility. The end fair market opinion I would have given to a buyer client looking to buy this is that 4G in late 2011 should trade for between $1,080,000 - $1,104,000.

Guess what, the closing took place on February 13, 2012 and the market valued the property at $1,082,500! - right dab at the low end of the range using the almost 5yr old same unit highly relevant comp that most brokers would immediately dismiss because its too old!

Appraisers' clients are typically the banks and they have guidelines that they have to follow and a known contract price in hand to work from. I am not an appraiser. As brokers, we are asked where a product is likely to trade and must use the most relevant and hopefully most recent data available to advise our buyer and seller clients accordingly - markedly more difficult.

Without that market contract price known its always a guessing game. This is how I feel a comps analysis should be done - and you can do it any way you want to. I just dont see how you could have got anywhere near as accurate a fair market estimate if you chose to use the more recent, but less relevant E-line sales and attempted to make 5-6-7+ adjustments.