Derek Morgan
Derek Morgan
Large Public High School Complex
Derek Morgan
Derek Morgan

    Common Mistakes When Analyzing Comps

    Comps, short for comparisons, is a term that can have different meanings depending on the industry and context. Generally, comps entail a comparison of financial metrics and other factors to quantify performance or determine valuation. In real estate, comps are used to assess property value by comparing it with similar properties.

    Defining Comps

    Comps in Other Industries

    In retail, it refers to a company's same-store sales compared to the previous year or similar stores. Stores that have been open for less than one year are considered new stores and including them in the growth rate calculation can create misleading results as they often experience high growth rates due to promotions and grand openings. Calculating comp sales helps investors understand if current stores are generating revenue growth.

    Similarly, in financial analysis, comps are used to assign a value to a business based on the valuation metrics of peers. When determining the fair market value (FMV) of a business through comparable company analysis, an analyst will utilize ratios based on market capitalization or enterprise value (EV) compared with performance metric such as sales earnings/earnings per share.

    Two young shop owners using a laptop in their store

    Why Are Comps Important?

    Real estate comps are recently sold homes that are similar to the property you’re trying to buy or sell in terms of location, size, condition and features. Comps are used by real estate agents to determine a home’s fair market value through the sales comparison approach to pricing property. The more equivalent the comps are to the property, the more accurate the pricing of the property will be.

    Comps demonstrate how much buyers have been willing to pay for similar, recently sold properties, making them a very useful resource for current home buyers. A clear understanding of comps is crucial for sellers because they help sellers set a realistic expectation of what their home is worth. Analyzing comparable sales provides sellers with a more objective way of determining the appropriate listing price for their home.

    When determining the valuation of a property, home appraisers will inspect the property, review public records and source comps from the multiple listing service (MLS). Real estate agents rely on MLS data when finding and analyzing comps. If you want access to this information without working with an agent, there are websites that aggregate information taken from local multiple listing services. Although these websites can be informative, they often provide inaccurate or outdated information.

    How Do You Find Comps?

    Public comps are used by investors to analyze stocks to purchase. Precedent transactions are more commonly used in investment banking scenarios in which one company is pitching the acquisition of another. Debt load, growth profile, and size can all impact valuation. Companies in industries that are asset-heavy shouldn’t be valued in the same way as companies that are capital-light and fast-growing.

    Comps can be found on financial websites such as Yahoo! Finance or Morningstar. The information offered up by Wall Street professionals is also available to individual investors on these basic financial websites. When doing a comps analysis, you should try to find at least three good comparables. Sometimes there aren’t any or only a few good direct comps, and many times you need to adjust the average multiple to make up for problems with the comp.

    Sometimes it’s better not to use a direct comp if it doesn’t fit well with what you’re trying to value. In that case, you could use a blended multiple or an adjusted multiple. Comps analysis works best when comparing companies within similar industries. It’s not always appropriate to compare companies operating in different sectors of the economy.

    How Do You Analyze Comps?

    When looking for comparables for a subject property, the following features should be present: Recently sold homes; nearby location; school district; size, including square footage and number of rooms; lot size; and age of the property. Optimal comps are typically no further than one mile from the property.

    When using precedent transactions as part of your comparative analysis it’s important that they match up closely with your subject company. You don’t want your comparisons being skewed because of differences between the two companies.

    Differences between the comps and the subject property can lead to inaccurate results. It is important to look for comps that are as similar as possible in order to get an accurate picture of the subject property’s value.

    The most common valuation multiples used for comps analysis include price/earnings ratio (P/E), price/book ratio (P/B), EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation, and amortization), and price/sales ratio (P/S).

    Common Mistakes When Using Comps

    Comparing Apples to Oranges

    Comparing Apples to Oranges

    Not all properties are created equal. It is not enough to simply compare two similar-looking homes; the features of each property must be taken into consideration. Two houses may appear to be the same size and have the same number of bedrooms and bathrooms, but if one has more land, it will likely be worth more. Ultimately, it is important to compare apples to apples when looking at comps and to not be fooled by superficial similarities.

    Not Adjusting for Location

    Location is a key factor that must be taken into consideration when using comps to determine a property’s value. The value of a property can vary significantly depending on its location; two similar houses can have drastically different values if they are located in different areas.

    It is important to consider the proximity of the comps to the subject property. Ideally, the comps should be no further than one mile away from the property in order to be a useful indicator of value. Also, when looking at comps for acreage, it is important to remember that acreage varies by location. All other factors being equal, more land means more value.

    When analyzing comps it is important to keep in mind that location can have a large impact on value. Comparing a property in a desirable area to one in a less desirable area can lead to inaccurate pricing. All other factors being equal, it is important to compare properties in similar locations.

    Not Accounting for Time

    Time is an important factor that must be taken into consideration when looking at comps. It is important to remember that the real estate market is constantly changing, and older comps may not be an accurate indicator of current market value.

    In order for your comps analysis to be accurate, you should look for comps that were sold within the last six months. It is also important to keep in mind that the comps should come from a similar time period to the subject property. Comparing a property that was sold in the summer to one that was sold in the winter can lead to inaccurate results.

    Aerial View of Residential Neighborhood in Vaughan, Canada

    Conclusion

    In real estate, examining comps means comparing properties that possess similar qualities such as size, age , location etc., as well as conditions of sale such as whether the property was last sold as distress sale or estate settlement. Comps are an important tool for evaluating the performance and valuation of companies, businesses, and properties. Comps provide buyers and sellers with an objective way of determining the appropriate listing price for their property and for investors, comps can be used to analyze stocks to purchase. Depending on the industry and context, there are different types of comps that can be used and when researching, it’s important to look at other factors beyond just the comparable multiples including growth rates, profit margins, debt loads, market caps, etc. With the right information and analysis, comps can be a powerful tool for understanding the value and performance of companies, businesses, and properties.

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