How to comp an investment home correctly: Real Estate Investing
To get the best use of this article combine it with our Youtube video where I go over live how to comp 2 different properties. Click here after reading to watch http://youtu.be/vDLpGvYbFoc
Out of all the topics, we will cover this may be the most important topic. So make sure you take good notes and pay attention. Successful real estate investing starts with being able to determine a home’s true market value and predict what it will sell for. When fixing and flipping property or wholesaling if you get the market value wrong all the rest of your numbers will be off, you will end up wondering where it went wrong and why you lost money or broke even. This key step is the number one issue why most people fail in real estate investing. Become an expert at valuing property and to be an expert you need expert tools.
If you want to be an expert at comping properties you need what the experts use and that is the MLS (The Multiple Listing Service) every area in the united states has one and it’s the same database real estate agents use to determine market value and list and buy property. If you were an expert auto mechanic would you use a cheap air hammer from your local Walmart? of would you use something professional grade like an air hammer from MAC Tools? This situation is just like that. What about if you were a surgeon, would you use and razor from home depot or a professional scalpel? You get the point.
To get access to the MLS some MLS’s may allow outside users to gain access with a small fee, most, however, require you be a member of your local association of Realtors. If you are not a Realtor no need to worry, almost everyone on the planet knows several real estate agents that can get access for you. However you do it, you cannot start comping property without the MLS. Sites like Zillow, Realtor.com, Trulia though they are improving do not provide accurate resale data or the ability to compare property with specific details. Getting close enough in real estate investing does not cut it. You need exact figures. If you are using online sites like Zillow, Trulia, Realtor.com to evaluate and make investment decisions you are ultimately going to lose most of the time. Sorry guys there is no exception to this rule, use the MLS.
The next key topic is understanding what an ARV is. When fixing and flipping property, we look at something called the ARV (After Repair Value). This simply means you are looking to see what your home will sell for after it has been renovated. To do so as you are looking for comps for homes that are move-in ready or have recently been renovated. We do not care about bank owned, REOs, dated properties etc. What will your home sell for after renovation and updates?
Once into the MLS:
Once you gain access to the MLS you will want to find similar homes that are comparable to yours in terms of features and benefits. You can do this by a search for homes that have sold recently in the area.
· Always start your radius search as close to the home and move out from there. Often times you will find similar homes .5 miles out whenever possible always stick with under a mile out from your home.
· You want homes that have the same features such as bedrooms, does the home have a basement, slab, crawl? Garage? No Garage? Similar square footage is key. Same style. A ranch sells for a different price than a colonial or a bungalow and so on. Remember SIMILAR FEATURES AND BENEFITS!
· Why is square footage so important? If you are just a few hundred square feet off it’s a big deal. Let’s look at this example. Let’s say your subject house is 1,200 square feet. And you find two comps one that was very similar in features and benefits that sold for $180,000 and had 1,400 square feet and one that sold for $178,000 that has 1,350 sq. ft. You are thinking to yourself they are both very close in square footage maybe I will get $178-180k for mine right? Wrong! Let’s break them down to cost per square footage. Home #1 sold for $180,000 with 1,400 sq. ft. so $128.57 a sq. ft. Home #2 sold for $178,000 and has 1,350 sq. ft. so $131.85 a sq. ft. So homes are selling roughly between $128-131 a sq. ft. Now if we apply the math to your home at 1,200 sq. ft. this means your home would sell between $153-157,000. A $25,000 difference in price for just 150 sq. ft. difference!!!! Do you see where people can run into trouble? Square footage matters!
· Always look for what has sold, not what’s listed or pending. Ultimately when your home sells it will have to appraise. Appraisers do not care what’s listed, the only price that matters is what has sold. Only look at sold comps. You can peek at active listings to see your competitors but do not make your buying decision on listed properties.
· Never look at comps older than 6 months. The market changes often. Homes that have sold over 6 months ago are now out of date. You cannot use them.
To recap some search criteria:
- · Keep Radius .5-1 mile out
- · Similar features and benefits style and square footage are key
- · Do not use comps older than 6 months old.
- · Compare apples to apples.
Determine 3 Scenarios:
As an investor when I am comping a home I look at three scenarios. I write down
- · A worst case sales price. I have to off this asset in the next week
- · A likely sales price. Price slightly below your ARV comparable
- · A best sales price. The market bids your property up.
I make my offers and investment based on the likely price. When I am running my numbers I also look at the worst case price to make sure worst case scenario I am not losing money. An example may look like this.
· You find comps in your area that support an ARV of $120k my 3 scenarios may reflect this
o Worst Case Price: $112k
o Likely Price $118k (Slightly below market value for a quick sale)
o Best Price $124k
Lastly, we are going to look at Market Forces. Real estate is a cyclical business, meaning it goes up and goes down. If you follow the trends this happens on average every 10-12 years. You can make money investing in every cycle and any stage, however, you have to know where the market is. For example, in Michigan, our market usually slows down or values stop increasing or even decrease slightly as we get into the winter months, December, January, February. I have to pay attention as an investor when buying property in September, October November because when the renovation is complete I'm going to be selling in a slow market and the prices may drop. You don’t want this to happen to you. So to counter this, I am conscious of my buying activity in the few months before and make more aggressive offers. If homes are comping at $120k in Oct. I know I will be selling in a down market I will make my offers based on a reduction in ARV. I will seek to buy at $115k to make sure I am safe. Don’t take your eye off the market and cycles and you can dramatically increase your chances of winning every time.
Live comping Examples: Make sure you jump over to my YouTube video here on the topic, where I will actually walk you through comping 2 local properties. http://youtu.be/vDLpGvYbFoc
Happy and profitable investing everyone!