|Effectively Using Real Estate Comps
One of the keys to the real estate business is establishing market value. In informal
polls that I have taken with students, the inability to feel comfortable using real estate comps is
one of the things that really keeps people from taking action. "What if I offer too much, or
sell it for too little?" These questions can lead to a "paralysis of analysis" that
kills your chances of doing real estate deals. Remember that the name of the game is speed in real
estate investing. Getting or not getting a deal often comes down to who can make the offer first.
Thus, I want to walk through how to make sense of the comps and use them to determine market value.
First, for those that worry about selling for too little Ė I guarantee that you will do
this at some point, so relax! There is always a buyer out there who will pay more for any property,
but waiting weeks or months for this buyer is not worth it to us as professional real estate investors.
The name of the game is to get in and get out. Buy it and sell it quickly. Thus, every house you sell
SHOULD be a good deal for your buyers. If you sell quickly, you can do more deals each year, and
make-up the extra few thousand you could have made on any given deal. The key is that you made money.
If you can do it once, you can do it a hundred times, so do more deals and donít worry that you
absolutely maximized the profit on each real estate deal. Remember that we make our money when we buy.
Buying low is our primary focus, because if you do that right, everything else will be fine.
It goes without saying that the more recent a real estate comp is, the more valuable it
is to us in terms of establishing market value. It also goes without saying that a property that is
listed for a certain price is not a comp. The key is what things have actually sold for, not what
they are currently for sale for. After all, the sales price is just someoneís best guess as to what
a property will bring. A comp is an actual sale shows what a real buyer getting a real loan has paid
in that neighborhood.
There are areas where you will have plentiful comps, and neighborhoods where there simply
are not many comps to choose from.
Where you have a good supply of comps, your job on establishing market value is much
easier. First of all, the more recent a comp is, the more use it is to us. You will want to get your
comps from Realtors. Realtors are a key part of this business, and you need to go out and establish a
relationship with a Realtor to help you get the best information you can. I know that there are sites
on the internet that claim to be able to give you comps, but without exception I have found their
information to be dated or incomplete compared to what I can get from my Realtor. We want the best
information that we can get, so use your Realtors! Remember that after you do your first deal with one,
they will be eager to help you in any way they can. (They will help you before that too, but once you
get the first one done, you are really in business).
Basically, in using the comps, you will be acting like an appraiser. You will be doing what
is known as a comparative market analysis. This is just comparing other properties with recent sales
to the property that you are considering purchasing, or getting ready for sale. Adjustments are made
by the appraiser for condition of the property, square footage and features etc.
You will have a stack of recent sales in front of you. The original listing information
will be included with each of these. You will thus know the square footage, number of bedrooms and
baths, any renovation clues from the Realtorís notes on the listing sheet ("New kitchen! New tile or
carpet throughout!") You will also have the days on the market and the original asking price and
sales price. Listing sheets can also tell you if the property is in rough shape. Details like
"New Carpet Allowance, or Fixer Upper" let you know that the property is probably in rough
shape. If you are looking at a house that is in rough shape, information on what other similar homes
sold for is invaluable.
What I like to do is first group these by their proximity to the real estate that I am
interested in. If I am learning an entire neighborhood, I typically will group them by street.
Assuming that I am pricing a particular property that a seller has contacted me about, or who I am
meeting later, I would stack up the comps that are right around that house from top to bottom by how
clearly they mirror the house that I am looking at. The closer to the house a comp is, the more weight
it has assuming that it is a good match for the property we are looking at. I would know the
preliminary details in terms of bedrooms and baths from the seller in our initial conversation. Or,
I could simply pull this information from the tax assessorís office online. Remember that the tax
assessorís office is not always perfectly correct. By looking at these, I would begin to get a picture
of what a house is worth in that area.
If some of the comps for a 3 bedroom 1 bath are at $120,000, and some are at $90,000, and
we donít have much more information than that, we can assume that the ones that sold for $120,000 were
in good shape. They might even by updated and mildly renovated. Again, the original listing sheet can
give us that information, as can a "drive by." If the paint is new, with a gleaming kick
plate on the door and fancy hardware, you can assume that this property was fixed up "first
class" to get that particular sales price.
Appraisers will deduct for square footage if the particular property is smaller than a
comp that is used. They may add to their appraisal if the property they are appraising is larger than
the other comps. We have found that the percentage of difference in size does NOT relate to a direct
percentage in value. In other words, a thousand square foot home is not worth 50% less than a home
that is 50% larger (1,500 square feet) on the same street. We have found that the best indicator of
value is the number of bedrooms and baths. If we can add a bath to a house, and are willing to do so,
we know that we can get a price for the home in line with other 2 bath homes. A one bath home will
generally be worth 20% less than a two bath home in my markets. Thus you can see how it pays to add
them where you can. We compare apples to apples where we can. Thus, trust comps that have the same
number of bedrooms and baths in your area. If your home is larger (say 4 bedrooms in an area of 2 and
3 bedroom homes), I generally use the comps on the three bedroom properties if three bedrooms is the
typical number of bedrooms for homes that have sold. I know that the 4th bedroom will help the home
sell faster, but I donít want to pay for that homeownerís overbuilding of his or her home.
Always be careful on comps that you are comparing the same architectural styles. We have
found that ranch houses sell at a significant discount to craftsmen style bungalows, even though they
may be very close to each other on a street or in a neighborhood. Thus, make it a point to actually
look at the comps and always knock off some money if the architectural style is not as desired if the
area has different architectural styles. I usually figure about 15-20% for this deduction if I canít
get good comp for what a ranch house (less desirable) sells for in my area vs. a craftsman style home
(more desirable). This is also a good rule of thumb to follow if you have an area with one architectural
style, and you are looking at buying the "lone ranger" home that is different from the rest.
Note that learning if any style is more preferred than another is part of your market research.
Typically, ranch style homes are the least desired, with older stately architectural styles bringing
When selling, we generally try to push the market where we can. Remember that we counted
on getting what the other "average" homes sold for when we figured out what to pay for the
property in the first place. We would make a profit on our pretty house even if we sold it for what
the others sold for, but we generally have repainted and cleaned up, so we should do somewhat better.
If most of the houses sold were sold in kind of average owner occupant shape, and we really went for
it and made it very pretty, we SHOULD get more for the house than the other houses sold for. That is
only logical, and the appraiser should see that. We have literally pushed entire neighborhood prices
up with some of the comps we have sold, and get calls from Realtors who need to have a good comp to
justify an appraisal in areas that we are known to invest in. If we go in and do a quick clean up, we
should sell for what other homes have sold for.
Be conscious of square footage as well and the number of rooms. If you have 5 comps and
each of them has a square footage that is 20% or greater than your square footage, even with the same
number of bedrooms and baths, be careful. You probably are going to need to discount your offer
somewhat to account for the lesser size. We generally will deduct 10% or so for up to 20% in lesser
size assuming that we have the same rooms (bedrooms and baths) that they have.
Generally the larger a home is, and the more baths and bedrooms, the more quickly it will
sell. Thus if you are going to buy any small homes (900 square feet or less) with two bedrooms, be
prepared for a longer holding period. It can take up to double the time to sell a smaller property
than its larger neighbors. Thus, if the average home sells in 30 days, you should count on 60 days+.
Figure those into your holding costs.
The biggest problem that people have is determining market value where they do not have
many comps. If you have a lot of comps, it is pretty easy to find some homes that are very similar
to the home you are trying to reach a value for. We recently had some experience with the type of
neighborhood that had just a few comps, and I will give you our plan for dealing with this type of
Tucked between a strong boundary (a major road), and a higher priced neighborhood, a
neighborhood of 400+/- houses sat. No one had really rehabbed properties in the area, which had
1950ís brick ranch boxes in mostly decent shape. They were owner occupied by blue-collar owners. The
streets had a nice feel overall, and it really seemed like a good place to try and buy some properties.
The problem was that not many homes had sold within the last year. Thus, looking at this as investors,
there was less available proof as to what properties would sell for. I looked at the comps that
existed and saw that they were definitely not rehabbed properties. They looked more like relatively
decently maintained properties that were sold more or less "as-is" to other owner occupants.
The zip code that these properties were in had been appreciating at a rate of around 20%
a year, so it looked solid as a prospective neighborhood to work. What we did was assumed that the
comps that we had were accurate for the market value of the homes in the neighborhood generally. All
the homes were typical 3 bedroom 1 bath or 2 bath homes, so it was really an apple to apple comparison.
We took the recent comps (only two or three) and gave those equal weight with the six or so comps over
the last couple of years. I knew that the area should have appreciated somewhat since those homes sold,
but I treated them as if they were recent comps to be conservative so that even if the area had not
appreciated much, I would still be covered. Furthermore, we assumed that the properties that sold
were in clean shape comparable to the condition of a clean rental. That meant new interior paint, clean
kitchen with decent countertops, nice bathroom sink and cabinet, and decent looking toilet. I knew that
all of the comps had central heat and air from the information on the comp sheet, so I knew that any
property that did not have central heat and air would be worth $3,000 or so less to me (cost to install
central heat and air) since I would have to install a system for that amount of money.
Thus to generate a value for a particular property, I simply had to take the average sales
price for similar homes within the last couple of years (which I had to go back that far because we
had so few sales in that area), and adjust for the cost of painting and minor fluff up. Subtract out
my minimum profit of $20,000 and I had a top price that I could afford to pay. Ordinarily, I would
not care about any comp older than 6 months if the market is appreciating. However, I had to consider
older comps here as these are all that were available.
Note that on the selling end with a property like this, you would not use the comps to
set your sales price. Because of the higher priced properties nearby, and the general huge
appreciation in the general area, these houses would be priced significantly higher than the comps
and inline with what you could get in a comparable neighborhood with comparable houses in architectural
style and feel etc.
Do you want to go into areas like this where there is not much clear market value on
comps? If you have not done your first deal, probably not. You should let someone else take the first
shot in the area. Let someone else buy and rehab and establish what the new market price is. Then you
can dive in and buy everything that you can get your hands on. If you were a beginning investor, you
could wait and watch an area like this. Once you have more experience, working in an area like this
will be a "no-brainer" as you will really start to understand your market and what the
average homebuyer would think of this area and react to different pricing levels.
Finally, there are areas where there are only a few comps or even a larger number of
comps, but the properties are all VERY different. Some have acreage, some do not. Some homes in the
neighborhood are contemporary, some traditional, some ranch style, some may be just a plain mishmash
of styles. In these circumstances, establishing value is very difficult. We do not like to work in
areas like this if at all possible. In the rare occasion that we would, the price on the house has to
be very low so that there is a great margin for error. We always want to stick to areas that have a
common style and where properties can be compared relatively easily. As we have discussed, not having
many comps will not stop us from establishing market value where the houses are of a common style. If
the properties are all wildly different, having few comps is a recipe for disaster.
Remember that you never have to estimate the value of a property perfectly. If you build
in at least $20,000-$25,000 profit (A MINIMUM!), a little wiggle either way will not be fatal. With
even a small number of comps, you should be able to get close to a value that someone will be willing
to pay for a property within a reasonable amount of time.
David Whisnant is a licensed real estate attorney in Georgia. He received his B.A. from
the University of North Carolina at Chapel Hill, and graduated from Law School at The University of Georgia
School of Law in Athens, Georgia. He is author of the
"The Complete Real Estate Investor
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