When selecting comparables, think about the word carefully… comparable. It’s in the word itself yet so many seem to forget this at times. You are trying to identify comparable properties, comparing apples to apples, or like to like. You want to attempt to pull comps like an appraiser would. With that in mind…
Here are some ground rules to help you make an informed decision when determining ARV:
1. Try and stay in the subject properties subdivision. If there is not enough activity in the subject properties subdivision you can go out in a radius or other subdivisions across local roads. Try and pick similar subdivisions with the same housing inventory/ amenities etc. How far your radius will go out will depend on where you live. Here in Texas, in the suburbs you can typically go out .5 – 1 mile and be pretty safe with your comps. However, using that same radius in the inner city of Philadelphia will not work, prices can vary wildly from one block or street to another. Don’t go across major roads or rail road lines if possible. Neighborhood makeup can change drastically in doing so. If you do this, make sure to drive the comps to make sure both the properties and neighborhoods are comparable.
2. Finish out level. Make sure to gauge what level of finish out the comparables have. Try to match it or slightly over, if you over improve a house it is going to cost you money.
3. Compare properties with similar square footage. Typically, the max I go is + or – 20%.
4. Make sure to DRIVE your comps. Don’t try and be a desktop appraiser. Besides, taking the time to drive the comps and ensure they are accurate will help you become an expert on housing inventory in your area.
5. Beds, baths, and garages. For instance, if your subject property is a 3/2.5/2 (3 bedroom, 2 and a half bath, 2 car garage) then don’t select a 2/1 as a comp. These are not comparable. With larger homes its typically acceptable to have some variance with the bedrooms. A 3/2/2 and a 4/2/2 can often be similar; however, the difference between a 3/2/2 and a 2/1 is night and day. A possible exception to this “rule” would be if the subject property can have a bedroom or bathroom added to make it match the comps.
6. Sometimes the comps in the area are so weak you won’t be able to find much of anything. In such cases I typically make a very conservative offer, typically 55-60% ARV minus repairs of what the properties tax assessed value is. Tax assessed value, at least here in Texas, tends to be conservative and lower than market value. Remember tax value has nothing to do with market value, it is simply a mechanism to help generate tax revenue. Tax value can be below or above the true market value of a property (or spot on due to a roll of the dice).
7. Pick a similar house style as your subject property. If your subject property is tutor style, don’t pick ranch style homes as your comps. Similarly, if the exterior is brick on your subject property, don’t select wooden frame houses either.
8. Go back 6 months for the most recent comps. Time is a factor when selecting comps. Sometimes when the comps are less than ideal you can go back 8-9 months. But make sure to examine how the market has changed since then? Has it improved or worsened? Try to apply this to your evaluations.
9. Year built, try and stay within +/- 10 years of the subject property or better when pulling comps. If you initially run comps with criteria (bed bath garage, sq footage, year built etc) and you are still bombarded with results, narrow your criteria a bit. Perhaps get a bit closer on the year built, square footage etc. to the subject property.
10. Lot size. This is typically a larger factor in homes of newer construction. For instance I recently looked at a house where I found 4 of the same housing product, yet 2 of them sold for 165, and the other 2 sold for 195. What was the difference? The 2 that sold for 195 were sitting on a little over half an acre and had more lot front footage, compared to the others at 165 that had less front footage and roughly a quarter of an acre. Sometimes lot size is easily overlooked.
Estimating the ARV is a mix of an art and a science. You remember the scientific method? We are trying to make an EDUCATED HYPOTHESIS as to what the house is worth, it’s not an exact science. Hope this helped. If you have any questions please leave them in the comments below and I will do my best to help you!