How to run comps and hot to know if they are accurate

Question

I need to learn how to run comps since my last deal fell through also how do you know if they are accurate I do not want to offer anything wrong on a home just to let another deal fall through help!!!!

Chris Feltus · Answer

@Billy Gardner I wrote an indepth reply to this in a previous thread from the other day. I will go ahead and copy and paste it here as well.

It's not that simple. When selecting comparables, think about the word carefully, comparable. Its in the word itself yet so many seem to forget this at times. You are trying to identify comparable properties, comparing apples to apples, or like to like. This is just one component, in addition to that you will need to be able to estimate a conservative ERC (estimated repair cost) as well. Both of these factors must be correct for you to successfully market the property. You want to pull comps like an appraiser would.

1. Try and stay in the subject properties subdivision. If there is not enough activity in the subject properties subdivision you can go out in a radius or other subdivisions across local roads. Try and pick similar subdivisions with the same housing inventory/ amenities etc. How far your radius will go out will depend on where you live. Here in Texas, in the suburbs you can typically go out .5 - 1 mile and be pretty safe with your comps. However, using that same radius in the inner city of Philadelphia will not work, prices can very wildly from one block or street to another.

2. Don't go across major roads if possible.

3. Make sure to compare properties with similar square footage (the max I typically go is + or - 20%)

4. Make sure to DRIVE your comps. Don't try and be a desktop appraiser. Besides making sure your comps are accurate it will help you become an expert on housing inventory in your area.

5. Beds baths and garages. For instance if your subject property is a 3/2.5/2 (3 bedroom, 2 and a half bath, 2 car garage) then don't select a 2/1 as a comp. These are not comparable. With larger homes its typically acceptable to have some variance with the bedrooms. A 3/2/2 and a 4/2/2 can often be similar; however, the difference between a 3/2/2 and a 2/1 is night and day.

6. Sometimes the comps in the area are so weak you won't be able to find much of anything. In such cases I typically make a very conservative offer, typically 55-60% of what the properties tax assessed value is. Tax assessed value, at least here in Texas, tends to be conservative and lower than market value.

7. Pick a similar house style as your subject property. If your subject property tutor style dont pick ranch style homes as your comps. Similarly if the exterior is brick on your subject property, don't select wooden frame houses either.

8. Go back 6 months for most recent comps. Time is a factor when selecting comps. Sometimes when the comps are less than ideal you can go back 8-9 months. But make sure to think, how has the market changed since then? Has it improved, or worsened? And try to apply that to your evaluations.

9. Year built, try and stay within +/- 10 years of the subject property or better when pulling comps.

This was mainly focused on ARV, recall both ARV and ERC must be accurate to get a deal.

Estimating the ARV is more like 8th grade science. You remember the scientific method? We are trying to make an EDUCATED HYPOTHESIS as to what the property is worth its not an exact science. Hope this helped, this sort of turned into a blog post.

Here are some additional great resources:

Danny Johnson Guide to Estimating ARV

BP Book on Estimating Repair Costs by J Scott

J Scott's Estimating ARV Primer

Bill Gulley · Answer

Well, I read the blog, nice, but he left out a very important aspect, the first consideration, location! Similar neighborhoods, geographic location and distance to main arteries and shopping/business areas;

It takes years to gain enough experience to drop into an unknown area to be accurate and you must begin with knowing the area, the market, the economy and sales trends to obtain any accuracy, otherwise it's a guess.

Keep reading, best thing is to go to appraisal sites and forums and just lurk, read the guidelines and the problems they have in the field. :)

Anson Young · Answer

Looks like there was a good blog posted today about it.  http://www.biggerpockets.com/renewsblog/2013/08/26/comp/

What @John Rooster - was bluntly saying is that analyzing comps really is an art form.  Cant really cover it all in a forum post.  I took a crap job for an agent for 8 months doing nothing but comps and bpos.  Did it suck?  Yes.  Can I drop into any market and be really confident on my values now?  Yes.  Worth it!

Bill Gulley · Answer

Billy, it's an art as much as a science, perhaps more of an art.  Selecting the right comps begins by knowing the area and market. That means viewing properties in person. In my area you can be 25K off on the same age, style, sq. ft. and school district not knowing the neighborhood yet still be within 3 miles of the subject.

Tons of information here on appraisal issues, search "appraisal comps" and you should get plenty of reading.

It's not just math. BTW, you'll hear "subject property", that's the property evaluated and you never adjust any value to the subject, adjustments are made to the comps bringing the subject in line with the comp sales. Adjustment values may be a bit of math, like 5K for a fireplace, but there is also a judgment call, some fireplaces could easily be 10K, so you need to know the difference as seen in the market.

Good luck. :)

John Rooster · Answer

'running comps' is something a Realtor does off the MLS.

Analyzing and Evaluating comps is something an investor does. There is probably a book or ten out there somewhere on analyzing comps. It is something that was always obvious to me, so I would not know how to explain it to someone. This is something most wantabes never get past, some people just do not have the skill set for it.