How to Use Comps to Find the Best Real Estate Investments
So you've found some potential deals and you're trying to decide which ones will make the best investments. This is where comps come in. Once you know the accurate value of the property, you can then run your numbers to determine your maximum offer.
So first, let's go over how to analyze your comps in order to determine an accurate value for the property. This step is CRITICAL to the success of your deals and thus your career.
Obviously, the very first thing you need to do is to get the comps. If you don't have a great real estate agent you can get them from immediately, you can now order them online at RealEstateCompsToday.com. It only takes 2 minutes to fill out the form and costs 5 bucks.
Once you submit your order, it will be immediately sent to an agent who is an expert in the neighborhood market of your subject property. The agent will pull your detailed comps and email them to you within about 1 business day.
Real Estate Comps Today has agents in every market in the U.S. even in rural areas. They'll also run comps on undeveloped land lots and commercial properties
Whatever you do, DO NOT USE an estimated value from an instant home value website. They are far too inaccurate. Imagine what could happen if your profit margin was $50k but the value you based your offer on was $100k higher than the actual value. That could ruin you.
Here's an example of how far off these instant value sites can be: Home Value Websites vs Realtor Comps
How you analyze your comps depends on what kind of comps you order. If you order a CMA (Comparative Market Analysis), the agent will do the value analysis for you. That's the easiest, fastest and most accurate way to go.
But, if you're a control freak and want to spend the time to do your own analysis, below are the most important things to consider:
Recent Sales: Use the most recent homes sold. Sales within 3 months is best. You can go back as far as 6 to 12 months if necessary when their aren’t many comps. Just keep in mind that, the farther back you go, the less accurate the sold prices will be because of appreciation and market fluctuations.
Location: Use comparables that are within a mile of your house if possible. A half mile is even better. It’s also important that the neighborhood is similar to yours. For example, if your home is of average quality, you wouldn’t want to use comps from an upscale area even if they are within a half mile. Also, if you live in a rural area where their aren’t many comps, you can go outside a mile.
Size: Use comps within 200 to 400 square feet of your house if possible. For larger homes, try to stay within about 10% of square footage.
Age: Use comps that have no more than a 10 year difference in the year built. But, of course, the closer the comps are in age to your house, the better.
Condition: Comparing house condition and construction quality is something that is often overlooked by homeowners and automated house value websites. Real Estate Agents will usually take these differences into consideration when determining your house value. But it's always a good idea to double check all comps to make sure they compare in condition and quality. An easy way to compare condition and quality is to look at the photos attached to the comps and to read the details in each comparable's MLS report.
# of Rooms: Use comps with a similar number of bathrooms, bedrooms and other types of rooms as well as garage spaces.
Lot Size: Also remember to look at the lot sizes of your comps. For instance, if a comparable property has a lot size 3 times the size of yours, it will usually have a higher value. In that case, you may not want to use that property as a comp unless you are short on comps. Your agent may be able to help you make a value adjustment for the difference in lot size.
House Style: If you have enough comps to choose ones with a similar house style to yours (i.e.: Ranch Style, Two Story, Multi-Level, Split Entry, etc.), then it’s a good idea to do so. If not, sometimes you will need to use a comps with a different house style. Your agent can help you decide the difference in value, if any, based on house styles that sell best in your area.
Other Features: Your agent can also help you determine value differences for various house features like a swimming pool, fireplace, granite countertops, wood floors, central air, decks, solar and landscaping among many others.
Choose comps that meet the above criteria and make value adjustments for their differences. That's what is so great about a CMA vs analyzing your own comps, the CMA comes with those value differences already adjusted for you.
A CMA is similar to an appraisal except that the appraiser actually visits the property and also makes adjustments for condition, construction quality, location, view, etc. BPO's(Broker Price Opinion) can be fairly accurate but are costly. A CMA is the closest thing you'll get to an appraisal or a BPO without the cost.
Once you have an accurate value for your property, you can now run your numbers. Then you can choose the best deals based on their potential for profit, the motivation of the seller, how much equity (bargaining room) they have, etc. Here's an example of a numbers crunch formula:
$150,000 After Repair Value (this example 1,245 sq ft)
- 18,675 Repairs (sq ft x $15) (use $20 or $25 sq ft if the house is more than 30 years old or is a major rehab or is very high end)
- 747 Holding Costs while waiting to resell (sq ft x 15% x 4 mo's)
- 500 Property Taxes & Insurance (4 mo's worth)
- 15,000 Real Estate Agent Fees and Closing Costs to resell (ARV x 10%)
- 5250 Financing Costs (4 mo's interest)
- 1,500 Vacant Insurance (ARV x 1%)
- 30,000 (profit you want to make, ARV x 20%)
= 78,328 Your Maximum Offer
If you want to learn more about strategies like these, follow me to stay updated on upcoming posts like:
- Various Ways to Wholesale.
- How to Build a Power Team Fast.
- Maximum Offer Formulas.
- Evaluating Comps and Markets.
- How to Protect Your Earnest Money.
- How to Get Proof of Funds, even for REO's when using hard money.
- How to Use Seller's Questions to Determine Exit Strategy.
- Best Ways to Find Leads, MLS vs FSBO.
- How to Sell Your Deals Quick!
- Deep Due Diligence.
- Making Offers - Contracts - REPC, FSBO.
- Multiple Choice Offers.
- Seller Finance Rentals.
- Creative Financing.
- Remodeling Cost vs ROI, get the most value return for your money.
- How to Do Short Sales.
- All About Tax Liens Investing.
- Rentals, Commercial, Cash Flow Properties.
- Land Development