How to Get Good Comps in Real Estate Investing

Comps are basically the true value of a house.  You can look at the price of houses for sale, but that doesn't tell you the true value of a house.  The true value of a house in an area is based on how much houses are SELLING for, not how much the houses are listed for. 

So, if you look in a neighborhood, you may find houses listed at high prices.  They don't sell at those high prices. They get made offers, they also come down before they sell.  It's the selling price of the house you want to go by to make a decision on how much you want to get for your house, or how much you want to offer on your house.  It's also known as ARV (average retail value, or after repair value).  The comps let you figure out what the ARV is. 

Comps also need to be similar houses of a similar age, in the same location.  Now, when I say the same location, you want them to be less than a mile away, the closer the better.  You want them to be sold, if possible, less than 60, or even 30 days ago.  With this volatile market, you really want to make sure that those comps are done on homes sold recently.  So, the closer to your subject property and the more recent those homes were sold, the more accurate your comps are going to be.

Now, we'll talk about where you can get your comps from.    First off, you can get comps from a Realtor or the MLS.  If you are a Realtor, you already know how to access them.  If you are not a Realtor, you can befriend a Realtor, and usually for about $20 or $25, you can get a Realtor to run comps for you. Realtors are good for getting comps because they are professionally trained to do so.  Note that sometimes when they are working with a Seller, they MIGHT want to bump their price up a little bit to maximize their commission.  Sometimes they might even do it for free.    It's give and take, do them a favor, give them a listing now and then, you'll find a Realtor that can do it.  The problem is, a lot of Realtors, they won't do it over and over again.  They'll do a couple, but they don't want to be your source for comps.  Sometimes you can need 5 or 6 a day. 

You can also get comps online, but be leery.  Some companies are good resources, they list sold house prices, but don't trust them so much when it tells you how much your subject house is worth.  You can use them to see how much houses sell for in your area, but when it comes to finding out how much your house is worth, I have seen as much as a $50,000 spread up and down.  $50,000 low, to $50,000 high.  Those online free sites are not very accurate, unfortunately.  I suggest against that.  The worst thing you want to do is buy a house for even as little as $15,000 more than what it is worth.  Then, you will become a motivated seller, and you don't want that.

You can also go to the courthouse, though it is tedious for only one comp.  You can contact them and get all of the records for all of the homes that sold in one area and find out what they are selling for.

 I personally use a service online that runs comps for me.  I put the subject address in and it gives us all of the recent sales around there, it tells us how much they sold for, how much loans are for on present houses too.  But, not everybody wants to pay for it.  If you are a true investor, it's worth paying for, because you want to sit down, push a few buttons, and get your comps.  Please research these companies before signing up with them.  Now, you can move on to make your offers and talking to sellers are buyers. 

Now, how do you evaluate?  It's easy if all of the properties are the same where it's the same model home over and over in the same subdivision.  It makes it a lot easier that way.  When you get a few of the sale prices, average them out, then you can figure out how much the house is worth.  It's real easy with condos because it's the exact same unit, right across or down the hall.  Make sure that the time is there.  If three identical units sold 7, 9, and 11 months ago, they are not good comps.  You have to adjust for the time in which the market changes for that period of time. 

If they are different types of houses, you have to go by different things.  You have to do more research.  You have to look at the size of the houses, the age of the houses.  If one house is 50 years old and one house is 5 years old, the value is different.  You have to look at the condition of the houses.  You have to look at the extras on the house.  Maybe one house has a 3 car garage and one house has a 1 or a 2 car garage.  One house has a pool.  You have to adjust for that.  If one house has a pool, that house is going to be worth more than the home without the pool.   

In a lot of cases, you can ask your seller what they feel the house is worth, which is always high.  Ask them how they came to that price.  Maybe they will tell you that they had a Realtor who gave them a CMA.  Always double-check on that.  You always have to run comps.  Never take a seller's word for it.  Always do your own research.

There is also a square footage method.  Let's say you have eight different comps for homes that are all different in a certain area.  I toss out the top one, which is always a lot higher.  I then also toss out the low one.  Then, I figure out how much a square foot the other houses are selling for.  I take the square footage, the selling price, do the math, and figure out how much per square foot each of those houses sold for.  I write it down, then I average it out and that will give you a good idea.  So, what you do is figure out the average price per square foot is for homes that sold recently in that area, and then you multiply that by the square footage of the house you are looking at.  That will give you a relatively decent comp.  Again, it's not an exact science.  It comes with a little bit of experience. 

It also comes with learning the territory.  A lot of you are working only in one area. But, there are certain parts of Chicago here, that you can tell me it's a one-bedroom, one level garage in Country Club Hills, and I can tell you how much it is worth, then adjust it for condition.  It's because I have dealt with that area.  But, if you are investing all over the country, or if you are in a big city, you have to run your comps.  The easiest way for me is to use a service, instead of doing all of the square footage work.

Now, there are things that you have to look at, that you have to adjust for.  Sometimes you have to throw out homes that sold for very low prices.  You might have 8 or 10 houses all that sold within a twenty thousand dollar range and one that sold for thirty thousand less.  You have to find out why it sold for thirty thousand less.  Did it have a foundation problem?  Was it a foreclosure or short sale?  Right now, there are so many foreclosures and short sales going on, you have to be aware of that.  When you look at your comp list and one or two homes look way high or way low, you either have to throw it out or you have to find out why.  These foreclosures are lowering the prices in areas. 

Now, when I am selling a house, this is what I do.  When I have an appraiser come in, or when I'm pricing my house, I use the highest comps in the area.  When I am buying a house or negotiating with a seller or I'm doing a BPO and that BPO Agent is coming in, and I'm going to give him some comps to help influence his BPO on a short sale, I'm going to give him the lower comps in the area and will tell him that we are basing our offer on these comps.  So, use the higher comps when you are selling, use the lower comps when you are buying. 

Once you have your comps and know the prices that houses are selling for, use these tips to evaluate them:

• Only use sold house prices, never listed ones
• Do not use these comps for properties over 4 units, those are commercial, and done differently
• Try to use comps as close as possible to the subject, hopefully less than a mile, and closer
• Comps should be as "fresh" as possible, 30 days old or less
• Compare "apples to apples", not 3 year old homes to 60 year old ones
• If a property is priced substantially higher or lower than the rest, find out why
• If the comps are extremely varied, figure out the square footage price for the area, and use that
• Use high comps when you're selling, and lower comps when you're buying, in negotiations

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