Today’s REI Classroom Lesson

Doug elaborates on how to find the right comps, including guidelines to follow. As a former appraiser, Doug is an expert on comps!

REI Classroom Summary

Square footage, age of the property, age of the sale, and the proximity of the comp to the property are all factors that need to similar in order for it to be a good comp.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the Flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Doug: Hello, my name’s Doug Van Soest, I’m with So Cal Home Buyers here in Southern California, and I am today’s host of the REI Classroom. And today, we’re going to talk about how to find the right comps and pinpoint your values.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Doug: Extremely important. Comps are everywhere, but what is really a comp? So let’s get into this.
I used to be an appraiser. Before we were flipping houses, I was an appraiser. So I didn’t realize how much that was going to help us in our flipping business because, from day one, I started analyzing these deals from the viewpoint of an appraiser. And I think that’s important because, you know, you can think you’ll sell it for x amount all day long, but ultimately, if the appraiser is the one who says, “No, this property is worth this amount,” then, unless you’ve got a cash buyer, that’s all you’re going to sell that house for. So when you’re analyzing these deals, from the beginning, from up front, it’s important to know or to look at that deal like an appraiser would and find the comps that they’re going to use, which are the real comps. So let’s dive into it on how you find the right comps.
First things first is proximity. You need to look for comps. If you’re in, you know, a suburban neighborhood or an urban neighborhood, the closer, the better. So, generally, that rule of thumb is a half a mile or less in an urban area, and one mile or less in a suburban area. Don’t go a mile and a half thinking you’re going to use that comp if there’s sales available that are closer than that. So keep it close in proximity, and another thing is, don’t cross major boundaries if you don’t have to. So don’t go across a freeway looking for comps over there, or across a major, you know, boundary line, zip code line, something like that, school, school district. Those are very important. Stay within your own, whatever your subject property is in.
The next thing is the square footage. You need to find homes that are plus or minus 25% of your house’s square footage. So if your house is 1,000 square feet, don’t look for comps that are bigger than 1,250. Don’t look for comps that are smaller than 750. You really can’t go beyond that. You’ve got to keep it close. Again, if there’s nothing available in that range, then you can expand it, but you’ve got to look within that range because a 1,500-square-foot home just isn’t comparable to a 1,000-square-foot home. That’s a 50% difference.
Next thing is age. If your house was built in 1920, you can’t compare it to a house built in 1985 or 2005, not comparable. You’ve got to stick within the same range. There’s not an exact rule for this, but if your house was built in the ’20s or ’30s, you need to stay with homes built, you know, from 1910 to 1940 or so, if possible. Again, if your home’s 10 years old, say, built in 2007, don’t go, you know, stay within about 2000 to 2012 or so. Stay within about a five-year range, if possible. You’ve got to find homes that were built in that same era as your house to be a real comparable.
Next thing is functionality. So let’s say you have a 1,000-square-foot house, but it has no garage and it’s on half an acre. Well, there may be a house down the street that’s 1,000 square feet, but it’s got a two-car attached garage, it’s on a 5,000-square-foot lot in a tract of homes that are similar, not really comparable. You need to find something that’s functional like yours. Let’s say you have a pool or horse facilities, anything like that. Try to find comps that have similar use, similar utilities, amenities as your house. So it’s not just square footage and age, it’s the lot size, it’s other things like that that are similar to the home that you’re, you know, trying to compare it to.
And then, the last thing will be age of the sale. Absolutely, do not go beyond six months, if possible, because the more recent sale, obviously, the better. If you have a home that sold last week, that is much more of a stronger comparable than one that sold five and a half months ago because market conditions change. Appraisers are always looking for the most recent sales. If you go back a year and think you’re going to use that as a comparable, if there’s been five sales that are more recent than that, the appraiser’s going to ignore it. It’s not a real comp.
So I hope that criteria helps you to determine the best comparables for your appraisal, to really pinpoint and know your values going into the deal. For more information on us, you can check out our website at spousesflippinghouses.com. That’s my wife and I’s website. We do a podcast, as well, spousesflippinghouses.com. And I hope you have a great day. I’ll see you next time.
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Doug along with his wife Andrea have been flipped over400 homes and have compiled a rental portfolio of over 55 doors all in Southern California since 2008. Along with raising their family of 3 children, they also have a free Real Estate Investing podcast called Spouses Flipping Houses.