3 Keys to Proper Comparable Sales

In an evaluation of a possible investment property, no matter what type or exit strategy, it is important to have proper comparable sales. For some, this process is completed by a Realtor® or even through a specialized software program (there are several on the market). Others look for sources of information on Zillow, Trulia, County Records, or other online resources. You want to have at least 3 comparable properties, but using more that fit the property criteria will help build your case for the valuation of the subject property. But to best understand comparables and what is happening in your local market as to pricing, there are three main things you should know for proper comparable sales information.

Location, Location, Location

It is obvious to say you want to have comparable sales of homes close to the subject property. But what constitutes “close”? In Urban locations the two top criteria are same school district/schools, and within .25 to .50 miles of the subject. Suburban areas you can look at a slightly more expansive radius from the subject. Depending on the density of housing in the suburban area, a half mile to a mile and a half would be acceptable, so long as there is not a change in schools or towns.

The location is important, as if you go to close, say less than .25 miles in urban area, it may be hard to find a recent sale. If you expand too far in an urban area, you run the heavy risk of entering into drastically different neighborhoods, housing designs, housing ages, and school districts or schools. It is very similar for suburban areas. Of course, the distance should always begin on the lower level of the ranges and work yourself outward to gather enough comparables to include in your calculations.

Date Last Sold

With the ever changing market, and price changes within those changing markets, last sold time frame becomes a very important items to monitor. To best gather comparable sales, you have to realize you are evaluating the subject property as to the best of your ability what the home is worth right now. Not two years ago, not four years ago. If you find that the home next door was sold four years ago, even if it is very similar (or even an exact mirror of the subject), the price is no longer reliable. Four years ago at this point, many markets were seeing drastic changes coming out of the financial crisis. Moreover in other markets, the impact of shadow inventory and the slow trickle of foreclosures at impacts on the market and pricing.

In order to get close to what an appraised price would be, you have to know the current market, or at least within an acceptable range. By staying within the geographical range, and then using a proper range for last sold, you will be closer to a proper value. The best is to stay within 3 to 6 months back for last sold dates. Just like in the case of location, start with the lower range first, and work yourself outward, from 3 to 6 months, to 6 to 9 months, and 9 months to a year.

Size, Type, Total Rooms, Beds, and Baths

Finally, the biggest criteria for determining whether a home is a good comp (and not it isn’t if it is the sale price you are hoping for), is that it meets the same/similar size (square footage), type (number of levels, basement v. crawl space, bi-level, split level, etc), similar number of total rooms, same number of bedrooms, and range of bathrooms.

These criteria will assure you are looking at a home, which in the current market, would likely demonstrate that your subject property could sell for a similar price. Square footage is a range based criteria. It is best to stay within 10 to 15% range from the subject property. In this, suppose your subject property is 1,000 square feet. This means that the lowest acceptable square footage for a comparable would be 850 square feet minimum to 1150 square feet maximum.

If your subject property is a ranch style, you don’t want a two story traditional home as a comparable. Similarly, if the subject is a crawl space foundation, you want to stay away from homes which have a full basement (especially finished). These items skew your comparable sales model, which could have issue long term depending on your exit strategy. Stick to similar house style, and deviate only if you have issue finding similar homes when you stay within the location and time from last sale metrics.

The other items for your comps will be total number of rooms, bedrooms, and bathrooms. A 3 bed 2 bath home is generally easy to find comparable sales. Very common size home. However, a 3 bed 2 bath home with total rooms of 6 rooms is very different from a home that has 8 rooms. Generally staying within range of your square footage range will prevent this (as added rooms or less rooms would add or subtract from the square footage). But check out further if you find that there is a swing in total rooms. For bedrooms, stick to the same number. If your subject is 3 bed, it is ok to go up to 4 bedrooms if absolutely required. If two bedroom, you need to stay at two bedrooms comps, as there is a significant difference in the market for each home.

Bathrooms have differing flexibility. A one bathroom house cannot be compared to two bathroom, especially if the comp home has a master bathroom. However, a one bath and a one and a half bath could be comparable. Try to stick to similar bathroom numbers.

Adjustments

Adjustments are normal case of appraisals. Appraisers have market based indicators to help make adjustments for comps. This can be things like adjusting for the subject having 1.5 baths, where the comps have only one bath. In some markets, an adjustment of $2,500 would be added to the comps in order to normalize the expected value. Similar adjustments will happen if you are stuck with different types of homes (ranch versus two level traditional), number of rooms or square footage, as well as extra features like parking (off street versus detached garage versus attached garage).

Conclusion

Many things will come with an official appraisal, including the discussed adjustments. But you can limit what comes from an appraisal being way off from your estimate by following the three specifics above. As well, be sure you look at the comps for things such as condition. If a comp seems to have a significantly lower sold price to what other comps are showing, it may be because of condition. For instance, if you are seeking to purchase a rundown home, you will likely pick it up for a huge discount. You might get the home for 50% of after repair value. Similarly, others may do the same. Do not include these homes in your home analysis. However, an exception will be in place if the area is being heavily impacted by REO and distressed sales.

If you follow these guides well, you will have more reliable figures for your own valuation of a deal, as well as if you are presenting the deal to funding partners or if you are seeking financing for the deal. These three items (location, date of last sale, and specifics) are the main driver of market value.