Smart investors know that any house will sell for the right price.
So the questions to ask are: “How do I determine the true market value for a property?” And “How far below market value should I buy and/or sell a particular property to capture the best return for my money?”
The answer comes from a careful look at “comps” or comparative and competitive market analyses. Generally speaking, a comp contains “for sale” and “sold” property with similar parameters, location, size, age and amenities to your subject property.
The key is to getting real-time comps with true, up-to-date local Multiple Listing Service (MLS) data. The MLS combines data from all the brokerages within a region and, according to REALTOR.com, MLS’s account for about 90% of all residential property currently for sale or sold.
Beware! Most websites, such as Zillow and other national “comps” providers, give estimated values derived from last listed price, tax-assessed values and/or complex algorithms. These providers may be “in the ballpark,” but they may not have access to local MLS data. Local MLS data is the raw data you need to accurately assess the real value of a property.
In fact, a “real” comp will provide deeper insight into the following values:
- comparative comps—what properties have recently sold? How does the subject property compare?
- competitive comps—what properties are currently listed for sale and how does the subject property fit within the mix of available property for sale?
- current vs. after repaired value (ARV)—what is the property worth today and what will the property be worth after improvements are made?
- top of market comps—what will your property sell for in prime, pristine condition?
So where do you get real-time comps? From most licensed real estate professionals. You can usually get a few free ones with your REALTOR buddy before you wear out your welcome mat. After that, be prepared to start begging. In addition, getting comps from a licensed real estate professional may take several hours—if not days—which could cost you the deal.
There is a better way! The best source for real-time comps is by becoming an Investway member. Our service puts you in the pilot seat; you no longer have to rely exclusively on a real estate agent to provide comps and search out the market for good deals in your behalf. Once you’re a member, you have real-time, unlimited access to most of the data a real estate agent has, including the MLS, comp reports, analysis tools and more.
Once you have a source for comps, here’s some tips to help you improve your game:
- Always run a subdivision report as well as a radial search to make sure there are not diverse values in a small area.
- Make sure you run a report without restrictions such as size or years, ensuring the property you’re considering isn’t extreme to the area.
- Once you have the reports, use the list of sold, active, expired and withdrawn properties to determine historical market, current market, and market absorption.
Determining historical market is best achieved by looking at property that has sold, expired or withdrawn. Trends to look for include a distinction between houses that sold pre-rehab and those that were move-in ready. You should also see a steady increase in price as square foot and number of bedrooms and baths increase. Expired and withdrawn properties may help you get an idea of the condition of a property. You may want to ask yourself, “Why didn’t this one sell? Was the layout undesirable? Were updates needed?” If possible, look at the photos and REALTOR marketing remarks to get additional details on specific property in the area. Once you gather enough information, you should be able to determine an After Repair Value (ARV) for the property under consideration by comparing similar “fixed up” property and altering the value according to age, amenities, size, etc.
Another factor in determining price comes from taking a close look at the factors that drive value: location, size and amenities. Location factors, such as corner lot, cul-de-sac, by the park, or backed up to a train track can have a significant impact on your property’s value that may not be evident when using comps. Amenities can also be a significant factor. Are countertops laminate or granite? Is the master bathroom renovated or original? Note that some amenities can cause both a positive or negative impact on a property’s value. An example of this would be an in-ground pool. If you only have an inch of grass surrounding the pool with no additional yard space, then the pool may be considered a liability. If there is a large yard and separate pool space where the pool creates an inviting atmosphere, then the pool may be an asset.
Once you have an idea of ARV, you need to look at the current market and decide what impact it will have on your property’s ability to sell. You will need to consider other inventory (i.e. your “competitors”) and the market absorption rate. Looking at other inventory or “for sale” property helps you determine how appealing your established price will be in the current market. If your property is immaculate and only priced slightly above a competitor who still needs some updating, your property will likely sell faster than your competitor.
Market absorption—or how quickly properties are selling in the area—is another trend to look at. If there is more inventory than willing buyers for the area, your hold time will be a cost you’ll need to consider. Using Days on Market (DOM), the quantity of inventory available, and the asking price of each property, you can estimate your holding time and how much it will cost you to hold and maintain the property until it sells.
At this point, you must decide one last thing: do you discount your price to sell quickly or do you ask a higher price? Sometimes it makes more sense to sell the house quickly for a 3-5 % discount compared to holding and maintaining the property for 6 months or more (and then discounting the price later after you’ve already sunk money into holding and maintaining the property!) Even if your house is distinct from others and would demand a greater price, you might make more money by advertising a more aggressive, lower price.
Savvy investors understand the importance of comps and can make money in any market. Got Comps?