Comparables (Comps)

Comparables, or comps, are recent sales of properties similar to the one being valued. Appraisers, brokers and investors use them to set a price range and, for income property, to derive a market cap rate by dividing each comp's NOI by its sale price.

Suppose three nearby rentals sold for $480,000, $525,000 and $470,000 with NOIs of $29,000, $31,500 and $27,600. Their cap rates are about 6.04%, 6.00% and 5.87%, averaging 5.97%. At that rate the example property's $28,892 of NOI supports a value near $484,000.

The weak point is the NOI behind each comp. Brokers' reported NOIs may leave out reserves or management, which pushes the derived cap rate up. Use comps whose NOI was built the same way as yours, or adjust them before averaging.