Sales Comps and Refi Comps are not equal! Know the difference before you get burned!

[Alan Asriants]

As someone who has real estate investing and sales experience—and as someone who has worked through these scenarios firsthand—you have to understand the difference between sales comps and refinance comps. This applies not just to a standard refinance, but especially to a cash-out refinance, where you are actually pulling money out of the property. Working in a city like Philadelphia, where real estate values are determined on a block-by-block basis, it’s incredibly important to understand the true value of your property. The true value is often not what it will appraise for—it is what it will actually sell for on the open market and what a buyer is willing to pay.

A lot of times, buyers purchasing properties with the intention of doing a BRRR use sales comps that are more than a quarter mile away from the subject property for refinance appraisal purposes. This can absolutely work—your property can appraise using a comp from a quarter mile away. However, if you were to actually list the property for sale on the market, you may get a very different result than what the property appraised for. Many investors are running into the issue of realizing that their property's resale value is nowhere near the value it appraised for during the refinance.

If you're planning on buying and holding for a very long time, you might end up in an okay position. But if you stretched comps too far from your subject property, you could find yourself underwater on the mortgage—even with what appears to be a safe 70–75% LTV. There are many cases where investors list their property at the "appraised value" and cannot sell it without taking a 10%, 20%, or even larger discount.

This is also true in the suburbs or in areas where values aren’t as block-by-block. For example, in our area, Warminster and Warrington are separated by just one street, yet the values in Warrington are significantly higher for a similar home due to the school district. Even though the distance is small, the difference in location—and thus value—is very real.

To summarize: if you are planning on doing a buy-rehab-rent-refinance scenario (BRRR) and you are purposely pushing your value higher using distant or less-accurate comps, understand that if you ever try to sell that property or calculate your true equity position, it may be much lower than what it appraised for. To truly know whether you're buying a good deal, it's important to have a professional agent review the comps and determine the real market value—what someone would actually be willing to pay.

Refi comps and sales comps are not equal.