“How to Accurately Analyze Comps So You Don’t Lose Big on a Deal”
By: Jim Zaspel
If You Get this Wrong, You WILL Money on Deals
When it comes to analyzing comps (i.e. comparable sales), what is the goal? The goal of course is to accurately determine the value of the property – whether it’s in a state of disrepair, slightly outdated, or completely renovated. In order to do that, you absolutely MUST learn how use recent sales to determine the value of the property that you’re evaluating…i.e. the “subject property.”
There Are Several Factors to Consider When Analyzing Comps
Distance – How far is the comp from the subject property? In urban areas, I use a 0.1 – 0.3 mile radius, but in the suburban areas, I’ll use 0.5 – 1 mile radius.
Size – The rule of thumb is that in order for a comp to be a true comp, it must be +/- 200 s.f. of the subject property. No, you can’t simply determine values based on a price-per-square-foot formula…it doesn’t work, for a number of reasons.
Style – Ranch, colonial, cape cod, contemporary, townhouse, row house, condo, etc. The closer the comp is in style to the subject property, the more accurate the comp is.
Room Breakdown – How many bedrooms and bathrooms are there? Here’s the point: a 4-bed, 2-bath house is way more valuable than a 3-bed, 1-bath house, assuming the size of the house allows for 4 beds and 2 baths. So, if the house that you’re analyzing only has one bathroom, always ask yourself, “Where can I add a ½ bath or full bath?” Then, of course you’ll need to factor this added cost into your repair estimate for the property.
Date Range – Unless you’re in a rapidly-changing market, you can usually go back a full 6 months for comps. Obviously, the more recent the comps are, the more accurate they are going to be.
Age – In areas with new construction, this becomes increasingly more important. New construction is always more valuable than pre-existing houses, even newly renovated ones. However, if the subject property was built in the 1970’s, and the comps are in the 1950’s, there is virtually no difference in their value, based on age. Keep an eye on this factor when analyzing the comps, and you’ll begin to see a trend. The good news is that houses in any given area tend to be around the same age.
Competition – What’s the ratio of active, pending, and sold transactions amongst your set of comps? If you pull 30 comps, and 24 of them are active listings (i.e. NOT sold), then you’d best move forward with extreme caution, because when your house hits the market, there will be plenty of other houses for prospective buyers to choose from! The more pending and sold transactions there are in your comps, the hotter that market is. Just keep in mind the condition of the houses that are currently on the market; make sure they are similar size etc. to yours, and check to see if they are brand-new renovated. If all the “active” comps are outdated but you’re going to thoroughly update yours, then the will have less effect on your value.
D.O.M. – Meet Dom! DOM stands for Days on Market. When reviewing your comps (active, sold, and pending), be sure to look at how long they are/were on the market before getting sold. If they all sold at a very similar price but were on the market for 6 months, then you might consider basing your ARV (after repaired value) on a slightly lower number so that you can sell the house quickly.
There are other factors such as school districts, property marketing period, price-drops/increases, and distressed sales (short sales, foreclosures, etc.) that you need to look-out for, as well, but for the purposes of this blog, the items listed above are the most relevant. Maybe I’ll do another blog on those remaining factors!
To YOUR Success,
Jim “JimmyZ” Zaspel
P.S. – Did you RSVP for Thursday’s real estate training event yet? I managed to convince my mentors, The Iannottis, to leave South Florida to teach all of you here in Philly how they’re absolutely crushing it in western PA and S. Florida.