What are ‘comps’? Why are they so important to real estate investors?
Comps are a critical part of investing in real estate. They are especially important to property wholesalers, and their clients. This can also be a confusing part of the process of buying, selling, and flipping houses. Master comps and you’ll have an edge in the market, find better deals, and make more money.
WHAT ARE COMPS BASED ON?
This is all about finding comparable properties and comparable property sales. Think of this like a property appraisal. Only you get to do the appraising, and generally save hundreds of dollars, or even thousands in the process.
Generally you’ll want to confirm your estimate of value with at least 2 to 3 comps. 5 is better. What is most important is how comparable other sales and properties are to the subject property you are working on.
Common factors to evaluate:
Square Footage Under AC
One of the primary methods of comparing property values is the amount of square foot under AC. This is the actual living area, not total square footage including garages and terraces, etc. In fact, some investors specifically hone in on and compare by price per square foot.
Bedroom count is perhaps the easiest way to quickly pick out real estate comps. Number of bedrooms is one of the most important factors, and trumps most other metrics. Be alert to properties and comps which have an abnormal number of rooms for the neighborhood. If a neighborhood is predominately 3 bedroom homes, and one is a 2 bedroom, which is definitely subpar. Similarly a 4 bedroom home in this neighborhood maybe over improved, and it may be difficult to justify a higher price with comps. This is also a factor to keep in mind when planning any remodeling work.
Bathroom Count
Number of bathrooms comes right after bedrooms in order of importance. ‘Half’ and whole bathrooms do make a difference as well.
Total Lot Size
This is the total size of the property, not just the building. Note that while total size is most important from a land value approach, which is part of appraising any property, and may hold the most value, buildable area can matter too. If this property is being remarketed to a developer or builder they want to know how much of the space they can cover with construction, as well as how high they can go, and how many units they are allowed with the current zoning. Setbacks and easements are worth looking out for too, though are not normally in the sphere of what is focused on when pulling quick comps.
View
What views does the property offer? How does the view compare to other comps? While it may not be an immediate factor it is worth keeping in mind what may or may not change the view in the future. A property which is up against a nature preserve which may never be built on may be more desirable for some buyers, versus one which could see the view blocked by a new high-rise at any time. Floor number is something to look at here when pulling comps for condos and coops.
Lot Size
How is the lot situated? Is this a corner lot or a waterfront lot? Is it an awkward shaped lot or oversized? Is there sufficient access to the property? When pulling comps it is critical to look at what neighborhoods or communities different lots may fall into. At first glance at the map two plots may appear close together. But on closer investigation one might be in a better neighborhood, or in a gated community with additional amenities. A common blunder made by newer investors here is not ensuring lots are in comparable settings in terms of property type. For example; a residential home on a street with industrial properties may present issues with financing. Just as an industrial property in a residential neighborhood might eventually be a problem.
Property Condition
This is another very important, but often misunderstood element in comparing properties and determining property values. Contrary to the common perception this is one of the areas which really has the least amount of impact on appraised values. It can greatly impact appeal, perceived value, and how many retail buyers are eager to bid on a property, but that is something completely different to appraised value. The exception is if there is a notable and substantial difference in property condition from poor to great. In general cosmetic condition will make little impact unless it is a functional issue. For example; a professional appraiser or bank isn’t likely to assign more or less value whether a home has stained and worn five year old carpet or brand new tile. It still has flooring. The same goes for new construction. It may not appear to make common sense, but banks aren’t going to give more value to a new $2 million dollar home built by one builder versus the next. You can put in gold toilets like Kanye West, but if the next house has the same number of porcelain toilets it’s a comp. Get to know what elements have an impact on value here, and which don’t, and you be able to invest with less risk, and for more profit.
Major Property Features
Garages, swimming pools, and elevators are some of the features which fall into this category and which can make a real difference in property value.
Time Since Recent Sale
Time since the sale was recorded is a major qualifying factor. In pulling comps you should be looking at the most recent sales. They should at least be within the last six months. Note that banks will default to the most recent comparables in an appraisal review. This is one of the reasons that your source of property data is so important. You need to know the freshest comps or you could be off by thousands of dollars. Pending sales may be used as additional supporting comps, but only actual sold and recorded comps should be used as your primary comparisons.
Proximity
Proximity is as important as time. Look for the closest comps. They should at least be within a 1 mile radius. The close the better. Again, look to make sure your comps are in similar neighborhoods and communities. Across the street could be a five star resort, or a luxury community with a private airstrip.
Now most real estate investors dealing with single family homes will be looking at the sales price. That is using the Sales Comparison Approach. Those selling properties on to funds in bulk, or who are dealing with turnkey properties or commercial real estate may be focusing on the income to determine a cap rate for comparison.
HOW IMPORTANT ARE REAL ESTATE COMPS?
Knowing your comps is incredibly important because:
It lowers risk
If you know your comps you won’t overpay for properties.
It helps secure better deals in negotiations
Use your comp data to justify your low offers with the hard numbers. It removes the emotion and basis negotiation on fact.
It empowers investors to make more profit
If you know your comps and values you can get in at the best price, and resell at the best price, creating the optimal margins.
It gives buyers confidence
Having solid comps to show your buyers gives them confidence in your offerings and can help them to make fast decisions.
It minimizes the need for costly, and time consuming full appraisals
Most investors simply can’t afford to wait and pay for full on appraisals on every deal they are evaluating. It just isn’t financially viable. There may be times for full appraisals, but you’ll save thousands by getting good at pulling your own comps.
If you don’t know your comps you’ll end up overpaying for deals. That means you could get stuck with properties you can’t sell too. At a minimum you’ll be leaving money on the table when you buy and sell houses. Most wholesalers can’t afford to wait weeks for a full appraisal because their edge is being able to close fast. Not to mention you don’t want to be throwing around hundreds or thousands of dollars on appraisals on properties that you may never contract for. On the flip side; being able to show your end buyers comps, and building their trust in your ability to read the comps well will lead to many more deals, and faster flips. So know your comps.
Find Out More About Comps
So how do you find comps? Where can investors find reliable and accurate comps? What comps should be provided to buyers of wholesale properties?
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