Evaluating Comparable homes to place value on your Investment Property

We often receive questions about how we evaluate comparable homes, and decide on a realistic ARV (After Repair Value) for our investment properties. Below I have posted an exchange regarding how to choose comparable homes. - I hope this is as helpful to you as it was for the investor who asked the questions. -Trevor

I'm still struggling with some aspects of determining value and ARV with comps, especially in regard to basements. I'm writing today to request that these specific questions be answered during the comping portion of the day, especially the one about basements.

- I'm from CA and comping the value of houses with basements - which is nearly all of them - is still a bit of a mystery to me. On the MLS I see unfinished basements and their entire square footage is counted as part of the square footage of the house. But obviously an identical property would have greater value if the basement was 50% or 100% finished, right? So how do we account for finished basements vs unfinished? What's the math? So, for example: A subject property has a 1,000 sf basement and it's half finished. Comp X has a 1200 sf basement but it's 25% finished. How do I account for that in my valuation? What's the math of it? (This is my most vexing question: If you can only answer one of these, please make it this one).

Value of basement square footage is comparative, and subjective. That said, I looked up the equation for the MLS CMA program and they are adjusting above ground GLA (gross living area) at $30 per square foot when they compare a subject property to other Sold comparable homes. Basement is only adjusted at $10 – unfinished space, and $15 for finished square footage. This is helpful, but you would also want to account for the quality of the finish which again depends on comparing to other recently sold homes.

I would also direct you to look at any appraisal you can get your hands on to learn the market, and how appraisers value it differently. Above ground GLA is worth the most, finished basement at ½ of above grade, and unfinished at 2/3 rd’s of finished basement. Disclaimer – As you learn the market this may change, but this is as close as I can get to the “Math” of it. Trust the comps and your gut.

- What to do when there just aren't that many comps. I see that relatively often.

Widen your search criteria. Your goal is to compare to what HAS sold recently. So I would look at all property types in the same area, open up the year of construction, open up the square footage of the home, and eliminate number of beds and baths, and garage and carport restrictions. Look at what HAS sold, and make your best judgment. Again this comes down to experience and gut.

- The comp is only 1/4 mile away but it's really a different neighborhood.

Does it fit with property type, and year of construction? If it is otherwise comparable then your appraiser will still use it and you can too. If neighborhood is a big factor then make an adjustment for it, but beware of major area barriers. Freeway, river, major roads. Some appraisers will not want to cross them in the appraisal. Sorry to say it but subjective.

Your goal is to improve the property and get the highest and best use value out of it. Improvements to the property can overcome neighborhood and barriers. What will it take in improvement to get 85% of prospective buyers to overlook the area?

- In that same vein, what do you do when you just don't know the area? So you're not sure if a given comp is valid or not.

Be careful. Investors that don’t know the market are asking for a lesson to be learned. Solution, learn the market. Pull comps, drive the comps, go look at as many homes in the area that are available for sale, and see what condition you get for the price. I don’t buy homes in Phoenix because I don’t know the market. Learn the area.

- How to adjust for mold, meth, high-tension power lines, close proximity to a busy street or industrial area, or multi-family complex, etc.

Mold and Meth can be changed. Other conditions that you do not have control over are wild card factors. I would hit a property about $5k for a busy street, but I would look at comps that were on busy streets as a control. Again, condition can overcome a unique location. Just as trees and views can improve value, these factors can detract from it. Will you property appeal to 85% of buyers?

- How much weight to give an unusually high or low comp.

Unusually low comps are what you are trying to purchase. These homes typically sell to investors because condition prevents a retail price, and condition can be improved.

For unusually high comps, can you determine what made it high? Extra big lot, pool, a feature of the property that makes a buyer want to pay more? Remove the added item and cost to reproduce it. Don’t hang your ARV on an anomaly. Remember, 85% of buyers.

- My wife recently heard a realtor who was giving a presentation at an REI function say that, "Beds and baths are more important, by far, than square footage; square footage is almost a non-issue." Frankly, I find that very hard to believe. I'd sure like to hear an experienced flipper address that issue rather than a realtor.

Well, I am a realtor and an investor. Again, my opinion. But, in the rental game the rent I can get out of a property absolutely depends on the bedroom and bathroom count. So if you are looking at purchasing buy and hold, I agree with that statement.

When marketing to retail buyers that are looking to live in the home, I definitely agree that other factors come in to play, but square footage is not the largest factor. There is a sweet spot of a home size that is between 2000 and 3500 square feet. Larger than that and the square footage price goes back down because it is not a necessity. Not every buyer is looking for, or can afford a 10,000 square foot mansion. In fact most buyers would not want that even if they could afford it. As an investor I would want to stick to something that will appeal to almost anyone. Open the buyers pool and you open the chances of a quick sale and competing offers. 85% of the market.