How to get a solid comp?

Question

When I did my first deal I got my comps from online websites such as Trulia. Of course, that did not go so well and the price turned out to be very high. Now I have a realtor who pulls MLS comps on a wide range of properties with rules like don't include properties crossing major highways, more than 5 miles away, has 'handyman special in the description'. My comps are getting better but they still seem too high on dilapidated properties. What should I do to get more precise comps? Could I add more MLS comp rules for my realtor to apply?

J Scott · Answer

Stick to within a half mile, if possible, and no more than a mile unless ABSOLUTELY necessary.  Stick to within 6 months, if possible, and no more than 1 year old unless ABSOLUTELY necessary.

Find houses that are the same style, built in relatively the same time period, have similar features (garages, porches, decks, etc), are similar in size, are similar in number of beds/baths, etc.

Adding MLS rules won't necessarily help you find better comps...finding comps is as much an art as a science, and it requires more digging (looking at pictures, figuring out external circumstances, reviewing DOM and price drops, etc) than just plugging in an MLS search.  Ideally, to determine a good comp, you should be intimately familiar with the area and the condition of the houses in the area.

Will Barnard · Answer

Getting to know your market in my opinion is driving neighborhoods at both day and night getting to know which neighborhoods are good and bad and to get an idea of what available inventory looks like. Second, back at he office. Paperwork due diligence is necessary and involves obtaining and tracking inventory levels. You want current, 6 months ago, 1 year ago, and 2 years ago. The more you ave the better. What this info will tell you is where your market is going after you chart/graph the compiled info. If you had 1000 units of inventory one year ago and 500 today, with 750 6 months ago, you would see on the chart that inventory levels were steadily declining which typically means a sellers market. You also want to know how many units of inventory in your market equate to a 6 month supply which is considered a stable market (not a buyer or seller market).

Lastly, you want to look at DOM. Days on market currently and in the past will give insight into how long it takes to sell a property. Having all this data will help you better understand your market.

Of course, in my case, I grew up and have lived in my local market for almost 40 years so I have inside knowledge and experience above and beyond all the data and charts. This is an additional edge.

Jon Holdman · Answer

Not sure.  This is where those new HVCC rules come into play.  The intention is that the seller is supposed to be hands off w.r.t. the appriasal so that the appraisal is more representative of the true value.  If there are 10 possible comps, there are often a range of possible values that can be constructed depending on which three or four are chosen.  If you, as an investor, pick the three or four highest ones, then its very likely the buyer's appraiser will come in lower because it is very unlikely the buyer's appraiser will chose the highest comps.  If you use the lowest ones, then you're probably underpricing your property.  That said, it seems that it is FAR more likely the appraiser will choose the low ones than the high ones.

The answer, Chenelle, is that you need all the comps.  Whether there are 2 or 20, you need to see all the possible choices an appraiser might pick.  You need to understand the process an appraisers uses to make adjustments to match those comps to your house.  Then you need to look at the distribution of values.  If all the comps are in a narrow range, you have good confidence in your value estimate.  If there is a wide range of values, you have less confidence in the number the appraiser will choose.  If there are only a few good comps (close by, recent, comparable size/beds/baths/style, etc.) then it can really be a crap shoot as to the value that will eventually be determined.

In one case, a refinance where I was the owner, I did meet with the appraiser and gave him a stack of comps.  We discussed all the work I had done and what the property looked like before the rehab.  He ended up using some of the middle comps, so the value was higher than I thought it would.  Everyone involved was somewhat surprised.

I'm not sure what sort of investing you're trying to do, Chenelle, but for wholesaling or fix and flipping, values are really, really important.  There's no easy and cheap way to come up with values.  Its an art as much as a science and I've lost some serious money on a deal where I screwed up the value.

Joshua Dorkin · Answer

Chenelle - There is no number that would minimize the errors.  If the wrong comps are used, then the total number of homes that are evaluated is meaningless.

Jon Holdman · Answer

In my opinion, no.  Others here will disagree.  I can't see buying something I've not seen in person.  I can show you pictures of pretty much any property and make it look good. You really need feet on the ground and all around the area to learn values.

Many years ago we considered moving to a different area of Houston.  Sugarland, TX, actually.  We were working with an agent looking at houses.  As we drove around, she could describe almost every house in the area.  What it looked like inside, what had been done to it, when it had sold, what she thought it was worth.  I was pretty amazed she knew all these houses.  But that's really the state you need to be at.  I won't claim to be able to do that for every house in my area, but I can certainly drive down a street and have a pretty good idea of what the houses look like inside and what they're worth.

Jon Holdman · Answer

You also need to look for ALL the relevant comps.  You never know which ones an appraiser might use, so you want to have a look at anything they might pick.  You really need to know where the neighborhoods are, not just look at major highways.

Account Closed · Answer

I went to the one in Austin Texas but it seemed to be full of noobs; people less experienced then myself or learners who just yak all day. I really felt like it was a waist of money to attend after two years and I had talked to everyone there.

Account Closed · Answer

I've been thinking of closing the risk gap a little by taking some classes. I heard the local community college has real estate and appraisal classes. Do you think this would help?

Account Closed · Answer

Understandable, I will start by working with my realtor then. As time progresses I hope experience will fill the extra comp gaps.

Account Closed · Answer

Since I can't really go and look at the properties physically, how many comps could minimize the errors?

How to get a solid comp?

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