What Comps do you use in todays market?

Question

Hello,

I just had a lively discussion with a realtor who was chastising me for how I was computing my comps.

Basically the discussion came down to what to include.  Based on the comps the realtor pulled, the price per square foot came out to $54.  However, I think that is too low because the MLS service that the realtor was using pulled in 6 foreclosures out of 8 comps.  The two comps which were not foreclosures, came out to $75 a square foot.  When I make the realtor fine tune the comps to not include foreclosure, so that I get 8 comps to use, the comps come close to $78.

I know the new government guidelines are making realtors include the foreclosures, but a comp pull with 6 of 8 comps being foreclosure seem a little ridicules.

My question to the board, what standard are you using in the market to estimate value?

Account Closed · Answer

In a normal market a foreclosure is not considered a normal sale between a willing seller and a willing and able buyer because it will artificially skew the numbers.

This is not a normal market. Whenever you have a concentration of foreclosures and REO they are no longer the anomaly in the market, they are the driving force in the market.

Lenders will look at comps too and they are not going to exclude 6 out of the 8 true comparable sales. In fact, they may be more skittish to loan in an area with a concentration of REO like that.

Brandon Schlichter · Answer

As stated by the other individuals.....

You have to value the property compared to what people are buying, not what they "Could be buying" which it seems atleast part like what you're doing.

If 6/8 sold homes in a area are foreclosures, then that area is REO dominant, which means declining sales prices, and if you open up your search range, you fall into the trap of looking at other areas with higher/different  values.

If the properties wer $57/sf then that's what they are worth. Now if they were in fair/poor condition, that's another thing, but if they were close to being what is normal for that area, you can not ignore them unless you want to loose money.

Having said that, if you want to throw away your money, I can give you my address and you can send it here.

Alex Aronson · Answer

Since the original posting, I found out that, 5 of the 6 homes were bought by investors that I know of.  All of the homes from what I can tell which are foreclosed on in this area require 10-15K of rehab to make them retail quality.  The home that I am buying has already been rehabbed.

Does this extra tidbit change the rules?

Lance Jackson · Answer

Actually, I see that all day long.  My folks live in the central part of California.  Houses on their street at the height of the market were selling for $350k, due to demand and all the foreclosures in their neighborhood, they ended up getting "lucky" and selling for $150k - a 57% decrease.  Now, this situation might be a little different as you state a steady growth of 1% - 2% over the last 5 years, but I find that perplexing as I just did a little research and the there was a 23% increase in the median house price from 2nd quarter 2004 to the height of the market in early 2006.

Jon Holdman · Answer

Supply and demand.  Supply is up because there are many house that have gone into foreclosure being dumped on the market.  Demand is down because its harder to get loans.  Supply now outstrips demand in many markets. That means sellers who actually want to sell have to dramatically drop their prices in order to attract one of the few buyers.

Michael Rossi · Answer

It sounds to me like you're wanting to find a certain price (ignoring the houses that are actually selling in your area).

You see, by changing the criteria, you're actually changing the reality of the situation.  That's why I never use "comps" - because you can get them to say whatever you like.  I KNOW my market and KNOW what prices are doing.  I don't need comps.

Mike

Alex Aronson · Answer

Lance,

Thanks for the reply.

The comps that I have seen on the foreclosure are REO.  From what I can tell, most of the listed price the realator is using are not what is owed on the property.  For instance, one property was puchased in 2004 for $94,000 with a FHA loan with 3% down.  It went into forclosure late last year and was recently sold for $59,000 after 180 days on the market.

Here in the Memphis market, prices for the most part in the last 5 years have been steady at 1-2% growth, stagnet, of 1-2% decline with a few submarket exceptions.  The house in question is not in one of these special submarkets.  Thus, I can not see how a home which was worth $94,000 could decline 32.5% in 4 years.

Does this help?

Alex Aronson · Answer

I would also like to include that to get my 8 non-foreclosure comps, the radius was expanded from .5 miles to 1.25 miles and required going back 4 months of recent sales instead of 2.

Lance Jackson · Answer

My thoughts are you have to take the foreclosure comps into consideration and use them.  However, how are you getting prices for the foreclosures?  Are these properties that went into default and then sold at auction?  Or are these REO properties that sold?  If not, is the comp price being used the actual mortgage amount that was defaulted on?