Evaluating comparable sales (comps) to determine the After Repaired Value (ARV) of a property is an art that you need to master as a real estate investor. It is not as simple as just going on Zillow.com and seeing what value they assign to the property.
The first thing I tell my personal mentoring clients about evaluating comps is to always disregard the aggregate ARV that any of the comp services provides. Here’s why:
You have no idea which properties they are including in their average. They can be pulling run down properties that sold at auction to beautiful mansions that are three quarters of a mile away. You don’t know. You need to select your own comparable properties and determine your own ARV.
When evaluating comps, I first sort them in distance from the subject property – so that I am looking at the closest ones first. I prefer the properties that are less than a quarter of a mile away – even up to a third of a mile – especially favorable are the ones within the same subdivision.
Of those properties, I look for the ones most similar to the subject based on square footage; bed/bath configuration; and age. What I often find, and you probably have to is that there are different groupings of sales prices. For instance, you may have some that sold around the $200,000 mark; another group that sold around the $140,000 mark; and some that sold for less than $100,000.
If there is a single property that sold for significantly more than the others, just disregard that one. Then focus on the highest priced grouping. Why? Because you (or your investor buyer) is going to renovate the property to attain the highest value. All you need to do is when you calculate your offer, account for the rehab dollars required to make the subject look like the comps.
One trick I use is to look up all of the sold comps on the internet. There are usually several sites that still display the listing and along with that are interior pictures. This provides additional information as to the level of rehab needed to meet the price point. Did they use solid surface counters? Did they install hardwood floors, laminate, or carpet? Is there vinyl or tile in the bathrooms? Are the shower walls tiles or just a shower surround?
The other question that comes up often is what if there are no comparable sales within a half mile and within the last year? That could be a red flag. It could mean that buyers are not interested in this area. It could also mean that it is so hot that no one wants to sell. The easiest way to determine that is to see if there are a lot of houses for sale. If there are and none have sold – that is a problem, and my advice is to pass unless you have some other mitigating information.
Bottom line is: choose the properties that you use for comparable sales. Select the ones most representative of the subject property; and then utilize the ones that are in the highest price point grouping. Never ever just accept an average number provided by any comp service.
Expect abundance,
Lou Castillo
P.S. Would you like a mentor who acts like a partner?
