Demystifying Comps – It Ain’t Rocket Science

From Craig Fuhr, The Fix & Flip Artiste …

I can’t tell you the amount of phone calls I’ve had with newbie investors, as well as veteran investors, on the topic of “How to find real estate comps.” I’ve spent countless hours speaking with investors about this and frankly, I think I have it down to a science.

So listen up my investor friend – this blog post will put an end to any frustration you have when it comes to pulling comps. Hip hip hooray!

Training Your Realtor

First and foremost, if you are not a Realtor, you must train the Realtor on your team to give you what you need. Remember, they don’t teach Realtors what investors do in “Realtor school.” So, you cannot expect a Realtor to automatically know what you need to make your investing decisions easier when it comes to comps. If you take just a little bit of time up front to train your Realtor how to pull comps for you, your frustration level will be greatly reduced.

Many people see comps as nothing short of looking into a crystal ball. Let me assure you, nothing could be further from the truth. Licensed appraisers spend years learning how to evaluate properties for their value. We don’t have that luxury. We don’t have the time or the money to elicit the help of a licensed appraiser every time we need to evaluate comps for a home that we’d like to purchase. What we really need is a down-and-dirty but highly effective way of pulling comps.

What is a Comparable Property?

What criteria is used to find comparable properties? When looking at comps you must remember it’s all about comparing apples to apples. In terms of style, you want to make sure that you are comparing similar style houses. If your house is a bungalow your comparable houses should be bungalows. In terms of size, your comparable houses should be similar. If you don’t know the square footage of your subject house, you can simply choose comparable houses that appear to be similar in size.

You also want to make sure that your comparable houses have similar amenities to your subject house. Keep in mind that the amenities in your subject house may change after the rehab is complete.

For instance, suppose you’re starting out with a three bedroom, one bath subject house – but after the rehab, you know the house will include four bedrooms, 3 ½ baths. So, you would then use comps that were 4/3s rather than 3/1s.

Finally, make sure that your comparable houses are located as close to your subject house as possible. Try not to extend your search boundaries any farther than 0.5 mile from the your subject property.

Our Example

Let’s take a look at a house that I’m thinking about buying. The house is located on Harford Road in Parkville, Maryland.

It’s an all brick bungalow with a dormer attic and a full, unfinished basement. It’s typical for the neighborhood and has 3 bedrooms and 1.5 baths. When the rehab is complete, the house will include four bedrooms and three full baths.

Below, is an actual screenshot taken from my MLS. The very first thing you want to set up is the criteria for your search. Notice that there are only three pieces of criteria in our search. They are: the status, the type, and the close date (sold). Any properties found in our results will therefore include these three pieces of search criteria. Pretty simple so far, huh?

Once we've established our search criteria, we then need to establish our physical or location criteria. This can also be seen as the boundaries for our search.

To do this, we must go into the mapping area of the MLS. Take a look at the map below. Notice the property we’d like to buy or the “Subject Property,” is surrounded by a bunch of other dots. The orange dots are homes under contract. The red dots are houses that have been sold.

Also notice that the boundary of my search is rather small. That’s the key here, folks. Try to make sure that your comps are as close in proximity to your subject house as possible; the closer, the better. (Now, this may not work when you’re trying to comp a house out in the sticks. For rural locations, you’ll have to extend your boundaries.)

Now that we have defined our boundaries and received results matching our criteria within those boundaries, we can click on each of the results in the map view – or go back to the “List view,” to evaluate the results. The list view looks like the picture below.

This is my favorite view when evaluating comps.

See the three red arrows? The first arrow is pointing to “Stat,” or “Status.” Clicking on the word “Stat,” sorts the listings by their status; in this case “Sold or Contract.” The second arrow is pointing to the “Email,” link. The 3rd arrow is pointing to the CMA link.

NOTE: YOU DO NOT WANT A CMA (Competitive Market Analysis).

CMA’s are useless. A CMA is a written report that compares your subject property to all of the comps that the Realtor chooses.

Why is a CMA useless, you ask…

CMAs usually include one picture of the property and rarely include the listing agents remarks. Agent remarks are very important, and pictures really tell the story of the house, don’t they? Pictures give you great insight into the condition of the property. They tell you if your comp is newly rehabbed, nicely updated or never been updated. A CMA only shows you numerical data, and comping houses goes far deeper than just the numbers.

Tell your agents….NO CMAs!

Back to Our Example

Our subject property is on a main-drag. Houses on busy streets are always cause for concern.

If you plan to rehab a house on a busy street, make sure you are in a very desirable area. You must also make sure the comps you pull are also on main-drags.

After taking a look at the comps from above, I highlighted the 4 best choices. (Check out the pic to the right.)

Recognize the following: First, I haven’t selected 20 properties…like most Realtors would. I also made sure to select a few houses on busy streets even though they may not have been newly rehabbed properties. That’s okay because my subject house will be gorgeously rehabbed – so if these “average” houses on busy streets can sell – my beautifully rehabbed house will absolutely sell!

Here are the four houses I chose as comps:

When evaluating comps – remember, you have to take only 5 variables into account:

  • Style
  • Size
  • Amenities
  • Location
  • Condition

I ended up choosing the white house on Old Harford. But, why? Well…

The house is located only one block away from our subject house. It’s also in “lived in, average” condition. Nothing special. It went under contract very quickly in just 45 days, and the asking price is $229,000.

I am confident that my subject house, located just a block away – while smaller in size will fetch at least $229,000 in new and gorgeously rehabbed condition.

So that’s it my friends. I hope this photo-heavy post helps to demystify comps for you.

Craig

P.S. Need a mentor?

Would Love to Hear from You

Got any questions? I’d love to hear from you in the comments section below.