How to Use Comps in Real Estate
Comparables (a.k.a. comps) can be a confusing term with different meanings depending on the industry and context, but generally it involves a comparison of financial metrics and other factors to quantify performance or determine valuation. In this article, we'll uncover the specific uses of comps in the retail and real estate industries, and how these comparisons can be essential to decision-making.
In the retail industry, comps typically refers to a company's same-store sales compared to the previous year or a similar store. This comps metric is used by analysts and investors to discover what portion of any sales growth is attributed to old stores versus new stores. Some large retail chains even release comps monthly.
Why is it important to compare same-store sales? New stores typically experience high growth rates for several reasons, such as promotions, increased interest from launches, and grand openings. Including new stores in the growth rate calculation for an entire retail chain can create misleading results. The comps metric only compares results for stores that are older than one year, which gives a better indication of true growth for the overall firm.
To calculate a company's sales growth rate, subtract the previous year's sales from the current year's sales and divide the difference by the previous year's amount. For example, if a company earned $2 million in revenues last year and $4 million this year, the calculation to figure out its growth rate would be $4 million minus $2 million, then divided by $2 million (or 100%). But an investor might dig deeper and ask how much of the growth was due to new stores compared to old stores. They would learn that new stores generated $3 million of the current year's sales and stores open for one or more years generated only $1 million of sales.
To calculate comp sales, the investor does not include sales from new stores. The new calculation is $1 million, minus $2 million, divided by $2 million (or 50%). When comp store sales are up, the company's sales are increasing at its current stores. When total sales growth is up and comp stores are down, the company is generating most of its revenue from the opening of new stores to maintain growth, which could be a sign of turmoil.
Comps not only supply investors and analysts with important information about the financial health of a company, but they also help retailers assess how well their existing stores perform against other locations.
Comps are also used in the real estate industry to assess a property's value. Similar to the retail industry, real estate agents and investors will compare a property to similar properties to determine its value. This can include properties of the same size, age, condition, and location.
Tools like a comparative market analysis (CMA) are used to help with the comps process. This report includes a list of properties that have sold in the area, as well as their sale prices, square footage, and other pertinent information. This data can be used to help establish a price range for a property and support or refute a seller's asking price.
It's important to note that a property's value is not just decided by the data found in a CMA report. Property values are made up of a wide range of factors, that you can learn more about in this our Quick Guide to Track Your Homes Value in 3 Steps.
Comparables provide valuable insights in both the retail and real estate industries. In the retail industry, comps are used to decide the profitability of a store by comparing same-store sales to the previous year or similar stores. In real estate, comps are used to assess a property's value by comparing it to similar properties in the area. Comps are just one piece of a much larger puzzle when it comes to making informed decisions, but we hope you are able to apply this knowledge to your own specific business ventures. Happy comp-ing!
We'd love to hear your thoughts about this article and our blog. Let us know how we did by completing the Unreal Estate Blog Feedback Survey.
Unreal Estate holds real estate brokerage licenses under the following names in multiple states and locations:
Unreal Estate LLC (f/k/a USRealty.com, LLP)
Unreal Estate LLC (f/k/a USRealty Brokerage Solutions, LLP)
Unreal Estate Brokerage LLC
Unreal Estate Inc. (f/k/a Abode Technologies, Inc. (dba USRealty.com))
Main Office Location: 1500 Conrad Weiser Parkway, Womelsdorf, PA 19567
California DRE #01527504
New York § 442-H Standard Operating Procedures
TREC: Info About Brokerage Services, Consumer Protection Notice
UNREAL ESTATE IS COMMITTED TO AND ABIDES BY THE FAIR HOUSING ACT AND EQUAL OPPORTUNITY ACT.
If you are using a screen reader, or having trouble reading this website, please call Unreal Estate Customer Support for help at 1-866-534-3726
Open Monday – Friday 9:00 – 5:00 EST with the exception of holidays.
*See Terms of Service for details.