Understanding comparable sales: An introduction

Comparable sales are a useful tool for anyone with an interest in buying or selling property. If you're looking for a good gauge on what price might be achieved, or that you can expect to pay, it's worth knowing what similar properties have sold for.

In fact, not checking comparables made number five on this list of things of things not to do when buying a property.

For instance, if the house next door was identical, on an identical block, and sold for $650,000 yesterday, you would likely be correct to expect the same result for your property. However, if your block was smaller, you'd be right to potentially revise your expectations downwards.

When a comparable sale... isn't

There are comparable sales and then there are non-comparable sales carefully masquerading themselves as equal four bedroom two bathroom houses in the same suburb.

If you have an intimate knowledge of a suburb, and the properties within it, you are more likely to know what properties are truly comparable. However, this also requires being honest with yourself.

Create a list of the features of your property. Note building material, block size, era, slope of the land, aspect, views, number of bathrooms and bedrooms (be honest about whether that fourth bedroom is actually an office), renovations that have occurred and the quality of the finishes and other aspects. This gives you a personal starting point to assessing, on paper, what it may be worth and will help turn it into a scientific approach.

To make things simple: If you are looking to buy a renovated house, do not expect it to be the same price as the unrenovated property you watched sell last week.

Also, do not expect the same factors to cause the same change in acheivable price across all suburbs. While in some areas the addition of a pool may add a substantial sum to the value of your property, in other areas it is just an expectation that the property comes with one.

You should keep records of sales in the area in which you're looking, and note down whether they are superior or inferior to your property. Over time, you should be able to understand what the value of different properties in the area are, and justify this reasoning - note this research paper that looks at comparable sales and how the different elements adjust the price in the mind of a valuer and some of the issues using this method.

"Data sets often omit the qualitative uncountable characteristics that real estate agents tell us are quite important in buyers’ evaluations of properties, such as neighborhood prestige, views, street appeal, or design quality," the report explains. This should be something you consider when looking at comparables - is there a street that commands a premium due to prestige?

The Real Estate Buyer's Association of Australia recommends that potential buyers consider looking at 100 comparable properties during the research phase. As with all data, the lower your sample, the less accurate it will be.

What to do when there are no direct comparables

When looking for comparable sales, you'll want to narrow down the field to as close to the property as possible. While, ideally, this will mean next door, sometimes it can mean needing to look a few suburbs away for something similar. A different postcode, suburb name or LGA can have a huge effect on property prices and the way buyers view a property.

The difference of a street can also be crucial, depending on noise factor and amenity.

The other issue when it comes to comparables is how recent the sales were. If the sales occurred more than three months ago (or even in a shorter time frame in a faster moving market), you may find that they are not a good gauge of what a property on the market currently will sell for.

When direct comparables are not present, you will then need to broaden your search parameters. Also consider looking at prices of units, townhouses and other stock just to get an idea of how selling activity is performing.

COMMON TRIP UP: Regularly, comparables are compiled based on listing price, rather than selling price. Those wanting to get the best gauge on value will want to find out the price properties sold for. This may mean attending auctions in the area. Try RP Data, PriceFinder or a similar service to find recent sales prices for properties you identify as comparable.

However, you do want to keep an eye on listings and notice any potential trends and the number of similar properties currently on the market.

MORE: Valuation experiences of readers - Letters to the editor