Real estate comps are a vital part of buying, selling, and financing real estate. How do you use them well?
Real estate comparables are a crucial component in investing in real estate. The better you navigate and use comps the better your purchase deals, your financing, your sales, and profits. So how are comps used in real estate? What makes good comps? Where do you get them?
HOW COMPS ARE USED IN REAL ESTATE
‘Comps’ are comparable properties or comparable real estate transactions. Real estate comps are used to determine the value of a property. This aids buyers in making and negotiating sound offers, lenders in providing an appropriate amount of financing, and sellers to get a fair price for their properties based on current value and the potential after a property is repaired or repositioned.
The better your comps and comp usage the better deals you’ll get on real estate, the better your financing, and the faster and more money you can sell for. Plus it lowers risk, and elevates upside potential from start to finish.
Valuing Properties
Most home buyers and sellers probably aren’t familiar with comps. They tend to rely on the final figure the comps suggest, as given by a property appraiser, or their Realtor. Yet, there are several way to use comps to value properties, and this is as much an art as it is a science.
Appraisers, Realtors, and investors utilize comps to come up with an estimate of ‘Market Value’. That is the highest price a buyer will likely pay for the property in the current market environment. They do this by comparing similar properties and property sales to the ‘subject property’.
TYPES OF VALUATION REPORTS
Property Appraisals
Official appraisals are performed by state licensed and certified appraisers. They are formulated using very specific rules, calculations, and forms. A full appraisal of this type will typically be required when obtaining a loan from an institutional lender. This applies to buying, refinancing, or building a property.
These reports will also typically go through an in-house appraisal review by the lender to double check the values, calculations, and comps used. It can take a few days to a couple months for a full appraisal depending on the property and how busy the industry is at the time. Costs can range from a few hundred dollars for a single family home to a few thousand for a commercial property.
AVMs
An AVM is an automated valuation, or desktop appraisal. These valuations use online data to assign a value to a home. This is in contrast to a full appraisal which may require an in-field inspection, measuring the property, taking interior and exterior photos, and deeper research.
AVMs are faster and less expensive, though also less reliable. They may be used for appraisal reviews from a distance, and may be acceptable for second mortgages or lines of credit.
CMAs
A comparative market analysis is typically used by a real estate agent to guide sellers in pricing their homes, and sometimes in guiding buyers in their purchase offers. CMAs are not subject to the stringent rules of full appraisals, and are more reliant on the knowledge, experience, and opinion of the individual agent. For this reason they may be used as a general guide, but not an official statement of value. Realtors typically provide these to their clients for free as a sales tool.
The exception here is the BPO (Brokers Price Opinion) which may be accepted by a bank or lender in valuing their portfolio assets, and in negotiating short sales. Brokers will charge for this service.
Comps
Real estate comps are the individual comparable properties and transactions used to formulate all of the above valuation estimates. 3 to 5 comps are often used to back up value estimates and calculations. Real estate investors can access and use their own comps to estimate value for themselves.
TYPES OF REAL ESTATE VALUATION
There is more than one way to value a property. In addition to our Guide on Home Values and Comps, here is a basic rundown:
Sales Comparison Approach
This is the most common approach, especially for single family homes and residences. This approach comes up with a Market Value based upon the recent sales of comparable homes. For example; if 3 of your comps are identical to your potential purchase, and they all just sold last week for $300,000, you would probably deduce that your property is also worth $300,000.
Replacement Cost
Insurance agents particularly look at replacement cost. This is the amount of money it would take to rebuild the property today. This may be higher or lower than other valuations depending on the market and current labor and construction costs.
Income Comparison Approach
This approach compares comps based upon their income production. This is specifically useful for commercial real estate and investment properties. Comps will be compared on their features as well as their rents, operating income, and returns.
Highest & Best Use
A property should always be appraised and valued on its highest and best use. That may mean a home on a single family lot might actually be better used to build an office or condo building since new development has taken over. Or a large parcel of agricultural land could be better used as a student housing complex for a local university, and so on.
Subject-To Value
The subject-to, or after repair value (ARV) calculates what the property should be worth after specific repairs and improvements are made, or a construction property is complete. This is especially useful for real estate wholesalers, flippers, rehabbers, landlords, and small builders.
What Are Comps?
What Are Real Estate Comps? Comps are comparable properties or transactions. This means they are comparable or similar in features as well as the factors involved in the transaction.
Typically only sold and recorded transactions will be acceptable in appraising a property. Note that there may be cases when a property has sold, but it is not showing up in public records yet. Talking to local owners and agents can help here, additionally; here is a guide on How To Find Real Estate Comps.
When there are limited recorded sales transactions then investors, appraisers and agents may add additional pending, listed, and expired comps to support their estimates. A pending sale could support valuation in a rising price environment or new construction development. Active listings can be a general indication of market direction, but clearly are too easy to manipulate to be reliable by themselves. Expired listings suggest the price point at which sellers and agents have pushed the ceiling too far. For example; if recorded sales comps are found at $200,000, but properties listed for $250,000 are not selling and are going to expired status, then the value is probably not that high.
To qualify as a comp the property needs to also be comparable in type, location, and features.
Selecting Comps
Location
All real estate is local so make sure you are choosing the closest sales. Ideally these are all within 1 mile of the subject property.
Property Type
If you are evaluating a single family home then your comps need to be single family homes of similar size and room counts. If you are valuing an apartment building then you should be choosing comps which have similar numbers of units. If you are valuing an office building then look at other office buildings of similar size, quality and class.
Age
The properties which are closest in age to your subject property will typically make the best comps. This is especially true where there is older housing stock and new construction.
Transactional Factors
How much does the county property appraiser’s office assess this home as being worth? Note that this number can be close or very different from current sales prices and market values depending on how recently they assessed properties, property specific exemptions, what is the norm for the area, and the speed at which prices are changing.
Presenting Real Estate Comps For Investors
Unless you are simply choosing to buy and hold long term, you will probably be presenting your comps to others at some point. This may be to the seller to justify your low offer, to a lender or partner to get financing, or to an end buyer if you are flipping or wholesaling the property.
There are no hard rules here. They can simple be shown in an email or printed handouts in list form. Or you may choose to put them into a professional looking PDF, PowerPoint, or video. The most important factor is having good comps, based on fresh, quality data that will preserve and build your credibility.
