Real estate comparables, or comps as they’re called, can be a real hurdle for some investors to clear. But, I’m here to tell you that it’s really not as complicated as you may think!
In today’s post, I’m going to share with you the factors that you need to consider when reviewing real estate comparables (by not taking these into consideration, you’re setting yourself up for trouble!)
Plus, I’ll also touch on how I get top dollar on my rehab deals while using these important comp factors AND the one mistake you should avoid.
We’ll look at these important criteria and steps in the comp evaluation process:
- Time of Sale
- Size and Amenities
- Narrowing Down
- Bringing Top Dollar
Let’s get to ‘em…
Obviously, location is a big deal in real estate on many different levels…
But, for our purposes, I’m talking about location as it relates to real estate comparables.
And so, our first factor is the location of the comparable properties…AKA how close they are to your subject property.
If they’re on the same street, or even right around the corner, that’s extremely relevant. Certainly a valid comp if other factors are met as well.
If they are, say, a mile away, in a different neighborhood, that’s less relevant. Stay closer to your subject property to help get the most accurate comps.
Time of Sale
Next, we want to consider how recent the comparable is when looking at the sold prices.
The more recently it sold, the more relevant it is. The longer ago it sold, the less relevant it is.
We like to see real estate comparables that are no more than 6 months old. If we can find ones that sold more recently, that’s great; less than 30 days ago is ideal! This will depend on how active the market is of course.
Size and Amenities
For the third consideration, you want to find out how comparable they are in terms of size and amenities.
This will include things like:
- square footage
- number of bedrooms
- number of bathrooms
- lot size
As with the other criteria, we want to eliminate those that are the least relevant.
Now that you have those three criteria locked in and you’ve created a list of relevant real estate comparables, by process of elimination, we come down to the best few comps.
You’ll want to narrow down your list to:
- The closest
- The most recent
- The most similar in size and amenities
Bringing Top Dollar
If you’re dealing with a junker and the intent is to wholesale it and a rehabber will fix it up (or you may plan to rehab it and fix it up yourself), obviously that house is going to be pristine when it sells and will bring in top dollar.
A freshly rehabbed house will do that. And perhaps most importantly, it will appraise for more than your basic, average-used house.
Why? Because everything’s NEW.
If it has a new roof, new windows, new cabinetry, new plumbing and new electrical fixtures…all of these features have a useful life.
In fact, did you know that a house has an “age” that doesn’t refer to the year it was built?
Once we rehab a house, we adjust the “effective age.” The house may have been built in 1980, but because we’ve just rehabbed it…we’ve adjusted the effective age to something much newer. The effective life of those new systems has been set to zero.
When I look at real estate comparables, I’m going to take the highest sold price among those that I’ve narrowed down by my process of elimination. The highest one may still be less than what my deal will sell for – because the highest among the comps is probably in an average-used condition – but our rehabbed house won’t be average when we’re done.
And let me tell you…
We get picky. We apply this process of elimination, we take the highest among them and we use that as our after repair value.
Where the Confusion Comes In
One thing I find that people get confused on is thinking, “This house could never sell for that. I’ve lived here for 20 years and I know that house won’t ever sell for that much.”
Sometimes we know so much about our market that it actually hurts us!…
We may think we’re super familiar with our market – and yet we’re dead wrong because the market has changed and we either don’t know it, or refuse to believe it.
Don’t be guilty of falling into that trap. Make sure you’re considering all these factors and evaluating properties the right way when determining real estate comparables.
Got any tips about real estate comparables? Please share below – I’d love to hear from you!