The Importance of Real Estate Comps for Investing
4 years ago · 6 minute read
When buying or selling an investment property for the first time, you will hear the involved parties talk about real estate comps. This is one of the terms that are important to the real estate transaction. Regardless of your knowledge level, knowing comps in real estate is a must if you want to get your investment right.
What Are Real Estate Comps?
Real estate comps (or comparables) are properties of the same size condition, style and age that are sold in a specific neighborhood. Evaluating similar homes as well as their prices help buyers and sellers determine the right market value of a home.
Sellers, buyers, and even real estate agents examine comparables when performing a comparative market analysis. This enables them to establish the price range of a property on the basis of the current or recent market activity. Appraisers use comps to determine the fair value of a property in the market when conducting an appraisal.
Quality comps in real estate take the following aspects of a property into consideration:
- Number of bedrooms
- Number of baths
- Final sale price
- Style and age of a home
- Home condition
- Lot condition and size
- Waterfront access and views
Why Are Real Estate Comps Important for Investing?
Comps in real estate are very crucial when purchasing investment properties for different reasons. Basically, comparables determine the failure or success of any investment. Here are some of the reasons why comps are important for real estate investing.
- Lowering risks – Evaluating similar properties enables a buyer, a seller, or a real estate agent to know the fair value of a property in the market. This prevents a buyer or agent from overpaying for a property. As such, using comparables will enable you to get the best deal in an investment property.
- Making profit – Comparables in real estate enable buyers, sellers, and real estate agents to determine the properties that will give them higher profit margins. This is very important because the goal is to maximize profit.
- Deal negotiation – Negotiating deals is important when investing in real estate. Using comparables enables buyers, sellers, and real estate agents to negotiate deals with sellers. This saves the time and effort required to convince sellers with solid facts and numbers. Thus, a buyer can use comparables to get what they want from a deal.
- Saving on property appraisal – A home appraisal enables players in real estate investment to determine a property’s price. As such, no matter what strategy you decide to work with, using comps is a good idea. That’s because it saves you money and time when it comes to getting a home appraisal.
Are Real Estate Comparable Properties Important for Wholesaling Houses?
Yes. Real estate wholesaling happens when a wholesaler or a party contracts with the seller, markets a property to prospective buyers, and assigns them the contract. A wholesaler performs a property evaluation. This evaluation entails taking a sales comparison approach. The wholesaler takes a look at comparable properties with an aim of determining the value of the property in question. This includes properties in solid listings and those sold recently in close proximity. Essentially, a property is itemized then compared to the others in the same location. The aim is to determine a property’s comparable sale.
When wholesaling houses, comps comprise of the following:
- Property rights type
- The financing used to buy the property
- Sale terms and conditions
- Local area market condition
- Property’s physical characteristics
- Economic characteristics
- Property’s location components
Why Are Real Estate Comps Important for Flipping Houses?
Comparables provide the most reliable and common way of assessing a property after rehabilitation or renovation. House flipping refers to the process of purchasing, rehabbing and then selling properties to make profit. To succeed in flipping houses, you have to determine the right price to buy a property in order to make more profit after rehabbing and selling it. This requires careful market analysis, cautious planning, and intuition.
Real estate comparables enable house flippers to determine the offer price that will enable them to make a large profit margin but still remain competitive enough to win them the bid. Nevertheless, using comps to get the ideal price requires experience and research.
Where Can I Get Real Estate Comps?
Comparables in real estate are simply homes or properties in the same neighborhood with the property that you want to sell or buy. They also have the same size in terms of square footage and are in the same condition, age and have similar features. There are several places where you can find real estate comparables.
Major among them include:
- Multiple Listing Service (MLS) – A local multiple listing service website is one of the best places to find comps. This service provides information that tends to be more accurate.
- Real estate agents- Experienced real estate agents know how to navigate MLS in order to find the right property comps. Because agents are familiar with the place where you want to buy or sell a property, they will interpret comps better. They will help you understand the appreciation of home value as well as price per square foot.
- Public property records- Most counties have records for the sale process of specific comparables and these can be used when finding comps. You can search the records online in some places while others require people to visit the courthouse. However, county records may not show the seller concessions. Therefore, if the seller reduced the price to provide credit for the required repairs, you will only find the final reduced price and not the asking price.
Before you start checking the listing price and mortgage rates, it’s important to find comps. Nevertheless, bear in mind the fact that the information you find online shouldn’t be taken as the 100% face value of a property. Data context and integrity can also be an issue when trying to determine the price of a sold home or property. Therefore, be careful when finding and using comparables in real estate.
How Do I Go About Finding Real Estate Comps?
Comps provide the information required to make the right property investment moves. But, how do you go about finding real estate comparables?
Here are useful tips to guide you:
- Get a property appraisal – Hiring a property appraiser enables you to determine the market value of a home. The appraiser is a professional that will save you effort and time when it comes to generating comps. Nevertheless, be ready to incur the cost of paying an appraiser which will add up to your property expenses.
- Conduct a comparative market analysis – Comparative market analysis provides a traditional way of getting comparables. Nevertheless, you have to analyze an investment property first when it comes to performing a comparative market analysis. You also have to familiarize with real estate marketing as well as the profitability metrics that are associated with properties. Such metrics include cash flow, capitalization rate, return on investment, and cash on cash return. It’s only when familiar with these metrics that you can perform a detailed real estate market analysis and get comps using address. After this, proceed to perform a neighborhood analysis. These investment properties should be your basis or reference that you can use to compare the property in question. It’s also important to consider other factors like property features and square footage or size.
- Use a Realtor – A realtor, a broker, or a real estate agent can also help you find real estate comps for a specific property. These professionals compile comps into data sheets. These data sheets are commonly known as Comparative Market Analysis or CMAs. CMAs are put together for homeowners that use a real estate agent’s, broker’s or realtor’s service when buying or selling a property.
The Best Real Estate Comps Software
Real estate comp software provides a faster and easier way of getting comps than compiling data from different sources. Such tools include Cloud CMA, House Canary, and Toolkit CMA. In addition to these tools, there are websites that you can use to get comps. These include Zillow, Trulia, Realtor.com, and Redfin.
It’s important to note that some of these resources dive deeper to give users specialized information. As such, accessing them requires users to pay a small fee. Pairing these tools and sites will enable you to gather the information you need to make the right offer for a property measuring certain square feet, situated in a specific location, and with certain features.
The Bottom Line
The quick decisions made by real estate investors can have significant effect on their return on investment. To make the right decisions, investors have to estimate a potential investment property’s value in order to factor it into their business plans. The most effective and fastest way to estimate a potential investment property’s value is by leveraging and understanding real estate comps. At first, this requires experience and diligent research. However, real estate investors eventually integrate comps into their investment routine and use them to grow their businesses.