Inman Handbook On Comps In These Chaotic Times
This is the first part in a week-long series exploring comps amid a pandemic and a tumultuous housing market. Check back for more comp coverage, including tomorrow’s look at the efficacy of Zillow’s Zestimates.
When Lily Jang decided to list her own home earlier this spring, she did her due diligence. Jang is a Keller Williams agent in the Houston area, and began the process — as agents are wont to do — by looking at comparable recent sales that had closed nearby.
“The comps supported $475,000,” Jang told Inman.
Of course Jang knew prices were appreciating quickly so she decided to list her house for $499,000. And then, as has happened to so many agents and sellers this spring, the offers started pouring in. In the end, she sold the house for $515,000.
Jang’s experience is remarkable for how unremarkable it has become; over dozens of interviews for multiple stories in recent weeks, Inman has heard again and again about listings that seemed to be priced competitively, but nevertheless sold for far over their list prices.
But the experience also highlights one of the bigger challenges in this period of insanely low inventory.
“Comps really don’t mean anything any more,” Jang said.
Thousands of agents across the country appear to share that sentiment. Last week, Allison Warren, a RE/MAX agent, asked the Lab Coat Agents Facebook group if other agents ever look at a house and think, “I have no f*cking idea what to price this house at?” As of the time of this writing, nearly 600 industry members had replied, and more than 2,600 people liked the comment.
The conventional wisdom surrounding comps, it seems, kind of no longer works.
To get a sense of how bad things are, Inman reached out to agents and appraisers all over the U.S. The takeaway from these conversations was that there are still strategies for valuing homes, but also that there’s no magic bullet. In some cases today, you do your best and hope things work.
“It’s almost like throwing a dart at a dart board,” Warren, who works in the Los Angeles area, told Inman.
Here’s what you need to know:
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Offers are pulling further and further away from asking prices
Data largely confirms that actual home prices are gradually pulling away from their list prices. Numbers that Redfin provided to Inman, for example, show that as of April 18, the average sale to list price ratio was 101 percent — higher than at any point since the end of 2017 when the data begins.
Redfin’s data also shows that the year-over-year change in the ratio between list prices and sale prices is growing. Specifically, the ratio had grown by 2.3 percent by April 18 compared to one year prior.
That’s a lot of numbers and ratios, but what it all means is that sales prices are pulling away from list prices.
Inman has already reported extensively on why this is happening, but to sum up demographic changes, the pandemic, labor and material shortages, and low mortgage rates have all combined to create an extreme imbalance between the supply of and demand for homes.
In any case, the point here is that home prices are moving quickly, they’re moving in big ways, and that movement is atypical compared to even the recent past. This in turn makes it harder for agents to use recent past sales — i.e. comps — to come up with their listing prices. How do you value a home, after all, if prices have been more volatile in the last two weeks than they were during the prior two years?
Tammy Hatch is seeing this play out first hand. Hatch is a managing broker with HomeSmart RE Associates in the Seattle area, and said that every listing in her area is getting 15 to 20 offers, and sells for at least $20,000 to $25,000 over asking. The end result is that conventional comps are less useful and it’s harder and harder to figure out what something should cost.
“It’s getting to the point where the agents, we literally don’t have an idea what things are going to sell for,” she said.
Consumers don’t always get it
This situation has created a host of problems for agents when it comes to using comps, including that their clients don’t necessarily always understand what’s going on.
Warren, the agent in L.A., told Inman that she recently spoke to some prospective clients who want to sell their home. They bought the house in 2017 for just under $500,000, but when Warren asked what listing price they had in mind, she got a surprise.
“‘We were hoping to get around $800,000,’” Warren recalled the clients saying.
Sonseeahray Harvin, a Keller Williams agent in the Detroit metro area, has seen something similar among her clients.
“It presents a challenge with some sellers because they see what’s going on, because they’re reading in the news,” Harvin explained. “And their instinct is to price higher thinking they can get even more. That’s my biggest challenge with sellers, getting them to understand.”
Consumers often overvalue their own homes, to the point that several years ago superstar Los Angeles agent Gary Gold told an Inman Luxury Connect audience that when he takes a listing he asks clients to think of their target price. Then he tells them to deduct 15 percent and let him know what that number is.
But that advice may not exactly work in a world where prices are rising so quickly and the only thing consumers know is that they should shoot for the stars.
In Warren’s case, after studying the area where her prospective sellers live she ended up with the delicate task of bringing them back down to reality, though even she admitted that figuring out what reality is can be tricky.
“I put them on the phone and said, ‘I think that we should start lower, I think we should come in at $599,000,’” she said. “And I said, ‘I think you’re going to get $625,000.’”
There’s danger in being honest though.
“They might not pick me to list it,” Warren concluded. “Some agents are getting passed over because other agents will tell them whatever they want to hear.”
Sometimes there just aren’t enough comps
One of the other big challenges when it comes to comps right now is that in some cases there just isn’t a lot out there to draw on.
“What’s most challenging about the comps right now to be honest is the number of houses that are selling,” Harvin told Inman. “I have a house where I tried to do comps going back six months and a mile out. And there were like three properties, and two of the three were the same house.”
Carl Medford, CEO of an eponymous Keller Williams team in California’s Bay Area, said his market is facing a similar problem.
“There are no comparable sales,” he said.
Medford went on to explain that inventory in his area is down 50 percent year over year.
“When you say there’s no comps that means no homes that are comparable have sold in that neighborhood in the last six months,” he continued. “And we have whole neighborhoods where nothing has sold. We have completely lost the middle move up market.”
It’s significant that Medford and Harvin, who live in places that are on opposite ends of the real estate spectrum, are basically seeing the same thing. Medford’s market is consistently ranked as among the most expensive in the U.S. Harvin’s market is an older manufacturing region. That the inventory, comp and pricing situation in both places is similar highlights just how unusual today’s market is.
Automated valuation models aren’t working well for many agents
Automated valuation models (AVMs) have been the subject of intense debate in the industry for a long time. Probably the best known of these tools is Zillow’s Zestimate, which uses software to automatically come up with a home value. However, other companies such as Redfin, realtor.com and some brokerages have their own AVMs as well.
Criticisms of such tools are not new, but in recent days some agents have expressed concern that rapid home price appreciation is making them particularly inaccurate. For example, Tim Collom, who runs the Tim Collom Real Estate Group in Sacramento, California, told Inman that AVM values are not currently lining up with each other.
“Each one of these guys never line up and they’re not off by $10,000,” Collom said. “They’re off by like $100,000 to $200,000. In Sacramento and some of these other areas, Zillow estimates can be high by 10 percent and they also can be low by 10 percent, but very rarely do they hit the mark right now.”
Other agents expressed similar concerns.
“Before I go to meet with clients, I’ll print out the AVM for that property from Zillow, Redfin and realtor.com,” Medford said. “They could be over $100,000 different from each other. But I bring those in to do a couple of things. It tells me what the sellers’ expectations are going to be, and helps me underscore the fact that those AMVs aren’t accurate.”
For it’s part, Zillow defended its own AVM in a statement to Inman, saying it has been “continuously improved” over time and that “it is incredibly accurate with a median error rate of 1.9 percent for on-market homes and 7.3 percent for off-market homes.”
However, the company did acknowledge that in “an extremely fast moving housing market such as what we’re experiencing today, it can generally be more challenging to value homes.”
“Which is why we have a team of data scientists who continually monitor our accuracy against the market in real-time and then take steps to adjust the underlying assumptions of our model accordingly to improve the Zestimate’s accuracy in today’s hot market,” Zillow’s statement continued. “Working with a great local real estate agent can help consumers navigate the challenging market. With home prices on the rise, the Zestimate is a helpful starting point, but it’s not an appraisal.”
Comps are tripping up appraisals too
Agents, of course, aren’t the only members of the real estate industry who use comps. Appraisers do too.
Mason Spurgeon, who owns Spurgeon Appraisals in Missouri, told Inman that as is the case with agents it can be a struggle for his appraisers — who work in both rural areas and in the St. Louis region — to find comparable properties.
“It’s a crazy time right now,” he added.
There’s also a kind of key philosophical difference between agents and appraisers, and that difference can scuttle a deal. When agents look at comps, in a way they’re trying to predict the future; they want the price that will entice the most and best buyers over the ensuing days or weeks.
But Spurgeon pointed out that appraisers look backward in time, not forward.
“Predicting the future is not an appraisers job,” he said. “My crystal ball broke a long time ago.”
There’s a good reason for this approach. Mike Baz — director of quality control for appraisal firm PCV Murcor — explained to Inman that appraisers have a different audience than agents, and that audience is primarily concerned about what has already happen.
“We’re writing the report for an intended user, and that intended user is typically a lender,” Baz told Inman, adding that Fannie Mae and Freddie Mac also use appraisals. “They’re all expecting to see historical data.”
So why does any of this matter?
Because for buyers who need financing, if the appraisal comes in lower than the offer price they have to either renegotiate the deal or (as is more likely in these competitive times) come up with additional cash to cover the difference. If they can’t do either of those things, the deal fails.
Agents who spoke to Inman for this story pointed to this problem again and again, saying that rapid price appreciation is routinely leaving a gap between offers and appraisals and making it almost impossible for buyers with loans to get houses.
All of which is to say that a lack of good comps means it’s harder for everyone to keep up with the market and potentially increases the odds that agents and appraisers won’t come up with similar numbers.
“It’s assumed that there’s going to be a gap now,” Medford said. “And it’s assumed that there’s no comps. Then a buyer has to scramble to make up the difference.”
How agents can cope with a lack of comps
No one who spoke out for this story had a one-size-fits-all solution to these issues. But agents did have some suggestions:
• Look further afield
Harvin deals with a lack of comps by gradually expanding what she’s looking at. Sometimes that might involve going back further in time, then trying to adjust prices based on how the market has performed recently. In other cases, she looks for comps over a wider geographic area, gradually expanding her radius from one mile to three miles to five miles and so on.
Harvin also said she also sometimes studies markets that are even further away, but which have enough similarities that they can serve as kind of analogs for the location of her listing.
• Expand a home’s “bracket”
Medford said that when agents price a house, they put it in a “bracket” according to its characteristics. So, if the house spans 1,450 square feet, “I will set the search to look for homes between 1,350 and 1,550.”
But Medford said he’s having to adjust that tactic now.
“I am finding myself opening up this bracket — sometimes removing the square feet parameter altogether to look for anything that has sold in the neighborhood in recent days,” he said.
• Talk to other agents
Hatch, the broker in Seattle, said that as comps have become increasingly meaningless, she’s adapted in a few ways, one of which is calling other agents in her area.
“I will call all agents with pending sales and ask how many offers they had and what was their highest offer,” she explained. “I need to know this so I can effectively price stuff.”
Not every agent is willing to talk, but many are and it helps her get an idea of what current market values are.
“For the most part it works,” she said.
• Join community groups
Warren, the agent who posted about comps in Lab Coat Agents, suggested other industry members similarly join online groups where they can get feedback and bounce ideas off of each other. It sounds simple, but she explained that being a part of a group has actually been a tremendous help for her.
“Yeah, I know everybody is competition,” she said, “but we can really help one another. It’s a really easy way to talk to other agents.”
So in the end, are comps meaningless?
The answer is complicated; comps are still essential, but the old way of thinking about them is becoming increasingly ineffective. Agents can’t just count on a robust list of recent sales in their multiple listing services these days.
Still, the industry members who spoke with Inman said that it’s possible to thrive in this market by being creative and hustling. Comps are out there, in other words, for the agents who go find them.
“You have to know your market,” Hatch said. “And you definitely have to be a little more aggressive.”
Marian McPherson contributed reporting to this story.