Running comps is hardly ever black and white. Once you know how to do it, you learn how to best compromise when the perfect comps just aren’t there. It becomes second nature to find the “next best” option for comps and for some properties, it’s difficult.
Different investors might have their own criteria, especially in different markets where the distance between houses is larger than a typical neighborhood or in neighborhoods with vastly different products (think old, hundred year old houses next to brand new, 6,000 sq ft properties that were built on two of the original lots once they tore down the little old house).
So why do we run comps when we’re looking at purchasing an investment property?
We need to find out the value of the property, once it’s been repaired, based on data from properties nearby. A homeowner might assume it’s worth XYZ based off of tax records and online sources but the most accurate data is going to be looking at other properties that have sold recently in the nearby area.
First things first, always look at homes that have actually SOLD. Never use houses currently on the market because people can list at any price, but will only sell at the “right” price.
Next, you want properties that sold both very recently, very close by, and very close in stats.
If you’re running comps for a 1,500 sq ft 1-story, built in 1972, with 3-beds and 1 ½ baths, you want something as close to matching this as possible.
We’re talking homes that are 1300-1700 sq ft, 1-story, built between 1965-1975, with 3-beds and 1-2 baths that ideally, is within ¼ mile and sold in the last 90 days.
If you find this, score!
Now look for 2-3 more that also fit that criteria.
Once you find 3 or so comps that are truly comparable, check to see if they’re truly apples-to-apples.
Do any of them have a pool?
Are any of them on a busy street or near something unflattering such as businesses or powerlines?
Have they been remodeled? You want comps of properties that have been remodeled because this will help you determine the accurate value of the property after your property has been flipped.
What happens when you can’t find enough comps in your optimal criteria?
You broaden your search little by little. Expand to ½ mile or widen criteria of when the property was built.
Go little by little so it doesn’t compromise you getting an accurate value.
In rural areas, you might only have a few houses per ¼ mile with the last one being sold years ago. That is a tricky situation and you need to be even more careful because your audience of who would be looking to buy in that area might be tiny and you’re at risk of being stuck with a property out in the boondocks.
With your 3 best comps, you’re ready to run the numbers and find out what the property might be worth fixed up. See the below example.
Your property is 1890 sq ft.
- $250,000 sold price/2000 sq ft = $125/sq ft
- $234,000 sold price/1820 sq ft = $129/sq ft
- $225,000 sold price/1780 sq ft = $126/sq ft
You would then average the $/sq ft and multiply it by your sq ft to get your value.
125 + 129 + 126 = 380 / 3 = $127
$127 x 1890 sq ft = $240,030
This means the property, once all repairs are done, could be worth around $240k. Your offer would be less than this, as an investor.
We have another blog on what an ARV is but $240k is your ARV, or after repaired value. Before you provide an offer, you need to figure out the % of the value you’re willing to pay and also determine the price of repairs for the property.
Running comps is a step into determining what to offer a motivated seller. Once you get the hang of it, it becomes second nature so practice running comps as often as possible until your confidence and accuracy is where you want it to be.