Real estate comps are crucial to your real estate investing business. Without knowing what a property is actually worth, you may over pay for a property OR even sell your property for much less than it is worth.
Using comps on real estate, you will make sure you are making good decisions when you buy and sell homes.
There are many ways to find the right real estate comps for your property, and we will look at all of those below.
First, we need to know what are real estate comps.
Comparable homes are located in the same area and similar in condition, number of bedrooms and bathrooms, square footage and other key features of the home.
This can also be a confusing part of the process of buying and selling houses.
With real estate comps, it is possible to determine the future
value of your property after you update the property. In projecting the future
value to your property there are many factors that need to be addressed.
The value of a property after it has been updated and fixed up is called the After Repair Value (ARV). The after repair value can be used even before you fix up the property to estimate the future value.
Let’s say you want to renovate your property and you want to upgrade the kitchen, bathrooms, or even a bedroom to sell your house at a higher price.
Using real estate comps, you can get estimated future value of the property by finding other renovated comparable properties in your area to determine what the future value will be.
Key Items to Consider When Using Real Estate Comps
For finding a competitive price on a real estate property,
investors look at real estate comps from recently sold properties
with similar characteristics, such as the size of the house, number of
bedrooms, location, etc.
The key criteria are to select the most matching properties in
terms of shape, size, and condition, which include but are not limited to:
Number of Bedrooms: The number of bedrooms is a major factor in the real estate comps for a property. Finding a comp property with the same amount of bedrooms is a must. Number of Bathrooms: Bathrooms, like bedrooms, play a major part in the value of a home. Make sure to have the comparable homes to have the same number of bathrooms. Construction Age: The construction age of the property should be within some years of other comparable sold properties. Square Footage: Larger square-foot real estate properties are worth less per square foot than smaller square-foot properties. Upgrades, Amenities, and Condition: Upgrades play a significant role in increasing the valuation on the property. Let’s understand with an example, a house with an outdoor pool will have a different valuation from a house without a pool. Also, accumulated and delayed maintenance will drop the estimated value on the house. Situated Location: Houses are available in primly locations and situated in a cosmopolitan city will have a higher valuation than a house in a run-down neighborhood area.
So you make sure to find comps on real estate in similar neighborhoods area under similar conditions and quality of life.
How To Find Other Properties To Use As Comparable Sales
Some principal approaches that appraisers mostly use to estimate property value that will be on the Real Estate License assessment involves analyzing the sales of other similar properties, called comparables.
This approach has numerous names; the most commonly consider is the sales or Market comparison and market analysis approach.
There are many ways to find properties to use as a comparable sale for your property. Each of these are ways an appraiser can find the right property to use as a comparable property.
The Basics of the Real Estate Comps Approach
The basic idea behind the sales comparison approach is to
compare previous sales of real estate to the subject property to being
appraised to arrive at an estimation of the real estate’s value.
Let's discuss with example, you ask an appraiser to appraise a four-bedroom, three-bath, 3,000-square-foot house in a typical suburban subdivision.
During her research into the sales in the area, The appraiser finds four sales of almost identical houses in the last four months.
These previously sold houses are called real estate comps or comparables. Each of the houses sold for $300,000.
The appraiser estimates that the value of the house she is
appraising is $300,000 because four similar houses recently sold for that
price. That is the simplest sales comparison approach.
Adjustments In Real Estate Comps Sales Price
The situations in appraisers most frequently have to deal with in applying the sales comparison approach are comparables that aren’t similar to the subject property.
Appraisers mostly go through an adjustment process to compensate for the differences among the properties.
For example, the subject property is a four-bedroom, three-bath house. The Appraiser the appraiser doesn’t currently know the value of this house.
A very similar house sold two months ago for $325,000. The comparable house, called Comparable A, is the same in all respects as the subject property except that it has five bedrooms.
Comparable A is superior to the subject property. The appraisers
research indicates that the value of the five bedrooms is $25,000. That means
that the buyer of Comparable A paid $25,000 more for that house than she or he
would have for a Four-bedroom house.
The Appraiser, when preparing her appraisal report, goes through
the process of subtracting that $25,000 bedroom value from the $325,000 sales
price of Comparable A. The resulting price of $300,000 is the adjusted sales
$300,000 (sale price of Comparable A) – $25,000 (value of fifth
bedroom) = $275,000 (adjusted sales price). Using the principle of
substitution, the adjusted sales price for Comparable A, or $275,000, is the
estimated value of the four-bedroom house.
Adjustments Real Estate Comps Age
The market takes the age of a structure into considerations when deciding on what to pay.
For Example: The subject property is 3 years old, and the comparable is 10 years old and sold for $225,000; otherwise, the houses are similar.
The value of that seven-year difference in age is $10,000. Should you add or subtract that $10,000 from the sales price of the comparable?
That’s right, you need to add the $10,000 because the 10-year-old house is considered worse than or inferior to the 3-year-old house. (The $10,000 figure is made up for this example.)
Real Estate Comps Adjustments of Time
Comparisons of “previous” sales can reason some difficulty because real estate values are likely to change over time.
As recent history has publicized real estate values can go up or down. Once again, The appraiser is appraising a house. She finds a comparable house that is almost the same in all respects to the subject property.
The comparable house sold for $300,000 ten months ago. Her research indicates that the real estate market has been quite strong in the area and property values have gone up approximately 1 percent per month during the past ten months.
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To properly account for this rise in property values, The Appraiser needs to ask the question, “What would the comparable have sold for if instead of selling ten months ago, it sold today?” It would sell for 10 percent more.
The adjustment calculation becomes 1 percent per month x 10
months = 10 percent $300,000 (sale price of comparable) x 10 percent (increase
in value for ten months) = $30,000 (value of time adjustment) $300,000 +
$30,000 = $330,000 (adjusted sales price)
The adjusted sales price for Comparable B, or $330,000, is the indicated value of the subject property.
You calculate a downward trend in property values over time the same way, only the value of the time adjustment is being subtracted from the sales price of the comparable to give you the value of the subject property.
How To Figure Adjustment In Real Estate Comps Values
Paired sales analysis is based on the idea that if two houses are similar in all respects except one.
The sales price of each house is different, the dollar amount of difference between the two houses is likely to be a value of the unique attribute or feature of one of the houses.
Look at these two houses for an example.
House A has four bedrooms. It sold for $430,000.
House B, which sold for $400,000, has three bedrooms.
In all other respects, house B is the same as house A. The only physical difference between the two houses in the fourth bedroom. The fourth bedroom, in this case, is worth $30,000.
How Buyers and Sellers Use Real Estate Comps
Why House Comps on Real Estate Matters To Buyers
There are several main reasons why house comps matter when you are buying a house. For one thing, considering at comps can help you determine a fair offer.
For example, let's say you want to make an offer on a house and two similar houses in the same neighborhood recently sold for $205,000 and $210,000.
You may want to make an offer that's slightly less than these with the expectation that you will end up paying something in this range.
House comps also matter in the buying process when it comes to financing. When you apply for a mortgage, your lender will typically order an appraisal before approving your loan.
If you stop making payments, the bank gets stuck with the house. Banks are in the business of making money on the money they lend.
They don’t want the property so Banks use comps on real estate to make sure you are not overpaying for a property.
Appraisers use a few methods when it comes to when comes to determining the value of your house, but a major component involves analyzing comps in the area.
When I recently had an appraisal done on a rental property, the appraiser used three comparable sales in the same neighborhood as a basis for calculating its value.
Why Real Estate Comps Matters To Sellers:
There are several main reasons why house comps matter when you are selling a house.
Every real estate agent you have ever spoken with has told you one of the biggest issues they run into with house sellers is unrealistic expectations of what a house will sell for.
To be fair at this point, it's difficult to make a rational assessment of the value of something you have an emotional attachment to.
Using comps can help you get a realistic idea of what your house will sell for. If you are working with an agent, they will likely pull some current comps and suggest a listing price.
This is you may known as a
comparative market analysis (CMA). If you are selling your house on your own, or you have not started the selling process, look at a few comps on your own.
They can help you to decide what you can expect to get for your house before you list it on the market.
How To Find Real Estate Comps Online
Public Real Estate Free Websites
Zillow is the leading biggest player in the online house values, through a feature called a “Zestimate”, which is an automated estimate based on public records and sales comps. You can also search for “sold” listings to decide your comps. Zillow.com:
Like Zillow, In Trulia allows you to search “sold listings” together comps. Trulia.com: Same
Redfin is another online brokerage website with online property valuation tools is available. Redfin:
Realtor is a website that now allow you to search for your home’s worth by showing what houses sold for in your area. Realtor.com:
Property Shark website is another which provides public data on a property, sale history, recent sales, and comparables. Here no need to provide your contact info. Property Shark:
Paid Services For Comps on Real Estate Comps
Home Smart Reports
Home Smart Reports offers a pay house value engine which including property information, nearby sales with a map, and a neighborhood summary, as well as much more advanced reports are available with risk analysis, many more comps, and other statistical charts.
The RealQuest service rated tops by several Bigger Pockets (BP) members provide tons of useful data on a given property.
Basics include: Property real estate comps and comparable sales, detail reports, assessor map / parcel map, street map, neighborhood information, legal and vesting,
Automated Valuation Model (AVM), Custom Searches, Transaction History, and Flood Maps
Comps on Real Estate and What Next
When looking for comps on real estate, there are many good options for you to find the right comparable properties for your property.
Honestly, there are many free ways to get comps on real estate for your property that you don't really need to pay for services anymore.
One word of warning though.
You get what you pay for… 🙂
Since you are not paying for those free services, don't expect to have the most accurate comps on real estate for your property. I personally believe that Zillow and others over price their comps.
Especially now that
Zillow is in the home flipping, their comps do have a bit of conflict of interest. They want the price of homes to go up so they make more money.
What I personally do is take in a 10% factor plus or minus on these “Free” comps on real estate.
That means if a home has a Zestimate of $100,000, I personally think it can be as low as $10,000 plus or minus from that estimate.
So, it may sell for $90,000 or for $110,000.
In doing this, I am protecting my downside when I am buying properties.
How do you use comps on real estate for your properties? Leave me a comment below.
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