Picking Comp's: Vertical or Horizontal?

What's it Worth? Who Wants to Know?

Pricing well is one of the most important skills a Realtor brings to the table.

In turn, that depends on knowing which "comp's," or comparable sold properties, to choose.

As defined by both Realtors and appraisers, the comp's are the three homes most similar to the "subject property" -- in terms of style, age, square feet, condition, etc. -- that have sold the most recently.

Once you've identified three homes, step 2 is to go through a "compare-and-contrast" analysis juxtaposing each comp with the subject home, adding or subtracting to adjust for the differences (How much? That's another "experience" judgment).

"Vertical" vs. "Horizontal" Selection

By convention, "recently" used to mean the last six months. However, as underwriting standards have tightened in the wake of the housing bust, some banks now insist on three months.

But what if there aren't three good comp's within the last few months? Or even one comp?

That's where it gets interesting.

Appraisers, working for the lender, will typically stick to the shorter timeline and simply look as far afield as necessary to find three similar homes. Call that "horizontal" selection.

By contrast, a good Realtor who knows the area will opt to choose the comp's "vertically," i.e., stay within the immediate neighborhood, and go back as far as necessary to find good sales precedents.

Guess which approach is more accurate?

Inside Information

The latter, because a Realtor who knows the chronology of local neighborhood sales can "connect the dots" going back as far as necessary.

They'll know which homes sold fast, which sold slow, which sale prices were aberrations -- and why.

Armed with that info, they'll have a feel for momentum (or lack thereof) . . . . and can price accordingly.

By contrast, bank appraisers invariably end up comparing geographic apples to oranges.

In their quest to find timely comp's, they'll jump significant -- but invisible -- neighborhood boundaries that render comparisons much more difficult.

Just in Minneapolis and the west suburbs, I can think of numerous, contiguous neighborhoods where you'd never compare a home in one neighborhood with one in another.

Country Club vs. Morningside

To pick just one example, consider Edina's Country Club and Morningside neighborhoods.

Both wonderful neighborhoods, they each have their own characteristic housing stock, supply and demand -- and per square foot selling prices.

Confusing two, disparate areas often leads to homes not appraising when they should -- or Sellers not pricing their homes appropriately.