About Real Estate Comps And How To Calculate Them
Simply put, comps – short for comparables – are recently sold properties similar to a property you're looking to buy or sell. This helps you determine the current value and the After Repair Value (ARV), or resale price, of that potential investment property.
Mastering comping is one of the most important skills new investors can master (for more skills new investors should nail down, check out our guide on investing for beginners).These like-for-like comparisons give you an accurate gauge of a property's current market value.
The Anatomy of a Comp: What Constitutes a Real Estate Comp?
All properties are unique, but when it comes to comps, we're looking for the Goldilocks' properties - not too different, but just right. Comps are properties with similar characteristics such as location, size, condition, age, style, and amenities. The more alike, the better the comp, and the better informed you are.
The Nitty-Gritty of Real Estate Comps
In the world of real estate, it's all about specifics. When evaluating comps, consider factors like:
- Proximity: The closer, the better. A mile radius is usually a good benchmark.
- Recent Sales: The more recent, the more accurate. Aim for sales within the last 3-6 months.
- Home Size: Look for properties within 10-20% of your target property's square footage.
- Home Features: Number of bedrooms and bathrooms, type of kitchen, etc.
- Property Condition: Renovated properties can't fairly be compared to fixer-uppers.
Real Estate Comps: The Investor's Roadmap
Now that you're familiar with what a comp is, let's get to the meat and potatoes. As investors, we need to know how real estate comps steer our investment ship.
Comps provide a critical benchmark for pricing properties. It’s the most effective way to accurately price your property for sale, or to calculate the ARV on a potential investment property.
Overpriced and your property sits on the market, overcooked and stale. Underpriced and you're leaving money on the table.
In short, comps help you price right, and price fast.
Comps Are Your Key To Successful Negotiation
Knowledge is power, especially in negotiations. Comps arm you with objective data to justify your offer or asking price. No one can argue with hard data, and that's exactly what comps provide. Use them as your secret weapon to steer negotiations in your favor.
Using Comps: The How-To Guide
Get ready to roll up your sleeves. It's time to dive into the nitty-gritty of finding and using comps. First up, consult multiple sources – real estate websites, county records, or a trusty real estate agent. Once you have a handful of potential comps, analyze them based on the factors discussed earlier.
Remember, it’s not just about understanding comps, it’s about applying them. Once you've established your comps, use them to guide your investment strategy.
Beyond the Basics: Advanced Comp Analysis
Understanding the basic mechanics of real estate comps is just the starting line. When we delve deeper, we see that effective comp analysis involves adjusting for differences. This is where your analytical skills kick in.
Making adjustments for differences in property features or conditions can provide a more accurate estimate of your target property's value.
Account For Market Fluctuations In Comps
Real estate isn't static. Market conditions can fluctuate, and your comps need to keep pace. Keep an eye on trends, shifts, and economic factors.
Comps: An Investment Tool for All Seasons
Real estate comps aren't just for buying and selling. They're a Swiss Army Knife in your investment toolkit. Use comps when refinancing to establish current value, or during negotiations to strengthen your position. They're also invaluable when considering renovations - will the increased value cover the cost? Comps can give you that answer.
Pitfalls to Avoid When Using Comps
In the world of real estate investing, knowing what not to do can be just as crucial as knowing what to do. Here are some common pitfalls to avoid when using comps:
- Ignoring the Outliers: Outliers – properties that sold for remarkably high or low prices – can skew your comp analysis. Always investigate these anomalies to understand their underlying reasons.
- Neglecting to Adjust: No two properties are the same. Make sure to adjust for differences to get a true comparison.
- Relying Solely on Automated Tools: While online tools can be handy, they often lack local knowledge. Always cross-verify with multiple sources and consult local real estate professionals when possible.
Where Do You Find Data For Comps?
You can find comps in a few different places - here are some of the most common;
If you only want to run comps on one or two properties, public data is a good source of comps data. While this isn't a scalable method to run comps, it's free, which makes it good for investors just starting out.
The MLS is a great place to find comparables. But - keep in mind that you either need a realtor's license to access the MLS, or you need to partner with a realtor (which can cut into your profit margins).
The easiest most scalable way to run simultaneous comps on multiple properties? Realeflow's comps tool. The all-in-one software draws on millions of public and private data points to deliver the most accurate comps on the market.
Comps: The Lighthouse in Your Real Estate Journey
Why do we care so much about real estate comps? Because, my friend, they are your guiding lighthouse in the choppy seas of real estate. Without them, you're adrift, floating aimlessly without a clear direction.
Comps give you the lay of the land. They show you what properties are worth in your target area and help you understand the dynamics of the market. Understanding comps can make the difference between a sweet deal and a sour investment.
They're vital for:
- Establishing Fair Market Value: Comps show the highest price a buyer would pay, and the lowest a seller would accept.
- Risk Mitigation: Armed with comp data, you can spot overpriced properties and avoid bad investments.
- Profit Maximization: Know what your property could sell for, so you don't undersell and leave money on the table.
- Investment Strategy: Whether you're flipping houses or renting, comps guide your revenue expectations and return on investment calculations.
In essence, comps in real estate are the lifeline of your investment venture, connecting you to the pulse of the market and guiding your every decision.
The Downside: What Happens If You Get Comps Wrong?
Time for a reality check. What happens when you get your comps wrong? It's not pretty, I'll tell you that. Incorrect comps can lead to some serious investment blunders.
Here's the damage they can do:
- Overpaying: If your comps are too high, you risk overpaying. That eats into your profits and can leave you underwater on your investment.
- Underpricing: On the flip side, if your comps are too low, you might undervalue your property, losing potential profits.
- Longer Time on Market: If you price too high based on erroneous comps, your property could languish on the market, causing holding costs to pile up.
- Incorrect Renovation Budget: If you're flipping a property, inaccurate comps might lead you to overspend on renovations that the market won't pay for.
So take your comps seriously. Double-check your data, cross-verify your sources, and adjust for differences. Your investment success depends on it.
Investment success also depends on the tools you use. That’s why Realeflow is the ultimate all-in-one investment software for investors who want to run comps, marketing campaigns, keep track of leads and so much more.
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