Hey, I'm Seth Williams from REtipster.com.
And today we're going to talk about comparables or comps for short.
If you've ever made an offer to purchase real estate, there's a good chance
you spent at least a little bit of time looking around at other similar properties
in the area to figure out what a reasonable offer price would be, right?
When you look around at these other similar properties in the area, what you're looking at
is known in the real estate industry as comparables or comps for short.
Comps are used as measuring tools to help us determine the fair market value of a property.
And they're used by a lot of different people in a real estate transaction, including sellers,
buyers, real estate agents, lenders, and appraisers.
And they rely on them heavily to figure out
what a property is worth.
The appraiser's determination of the property's value has a big impact on the bank's decision
to lend money, because if the property isn't actually worth what the borrower wants to pay for it
it could be putting the bank at risk of overextending themselves on the loan.
But when you're looking at counts for the purpose of trying to estimate a property's value
there's one big underlying problem we have to acknowledge.
In a perfect world a comparable property would be 100% identical
to your subject property in every conceivable way.
But the unfortunate reality is that no two properties are exactly alike.
Every property has differences from the ones around it, everything from the land it sits on
to the location of the property, to the condition of the interior and exterior
the age of the property and a whole lot more.
Even so you can usually find at least a few comparable properties that are similar enough to the property
you're evaluating to be reasonably accurate at evaluating your property.
When trying to find good comps
there's a number of key things that you're going to want to look for.
Recently sold properties
In order for a comp to be valid, you need to know what price it's sold for, and it should
have been sold within the past 12 months.
And if the market is changing rapidly, you might even want to narrow that down to six months.
The more recent this sale, the better the information, especially in a rapidly changing market.
Nearby locations.
The location of the comps that you're using should be as close to the subject property
as possible.
When you're looking for comps in an urban area, they should be within the same neighborhood,
or at least in the neighborhoods nearby.
Assuming the nearby neighborhood has properties of a similar size, age and condition.
And it usually does make a difference to stay within the same school district and zip code
In a suburban location
comps should be within a mile of the subject property, but they can be up to three miles away
possibly even further if you're in a rural area where they simply aren't any nearby comps
Size.
Good comps should be of a similar square footage and or acreage to the subject property and have the same
number of bedrooms and bathrooms as the subject property.
Property type.
If you're trying to figure out the value of a single family home, don't compare it to
a multi-family property or a condo
Features and upgrades.
Good comparables should also have similar features and upgrades to the subject property
that you're trying to evaluate.
For example, a fixer upper would not be a good comparable for a newly constructed property.
Number of comps.
Having more than just one comparable is usually a pretty good idea.
Three to four comparables are usually sufficient.
Assuming the comps are appropriate for the property you're evaluating.
And this is actually a really big deal to pick the right comps, because if you pick
the wrong ones, it can completely mess up the value that you're trying to determine
for your property.
Arms length transactions.
This means the buyer and seller had no prior relationship.
They weren't family members, they weren't friends and the sale price between them is
actually an accurate portrayal of that property's market value.
It wasn't discounted, there wasn't special favor given from one party to the other.
We actually have a whole other video explaining all the differences between arms length
and non arms length transactions.
I'll be sure to link to it here in this video, if you want to go check that out.
So once you've got all the relevant details figured out about your property like the location,
the size, the bedrooms and bathrooms, and so on, then you can go on a website like Zillow
or realtor.com and start plugging in those similar features and characteristics and search
for similar properties that have sold within the past six to 12 months.
And you'll start finding them pretty quick that way.
And remember, since no two properties are exactly alike, you're probably going to have
to make some tiny adjustments to account for those differences you find between your property
and the comparable properties that you find.
For example, if your subject property has a wraparound porch worth somewhere around $8,000,
but all the comparable properties that you're finding don't have any porches
of any kind, or definitely not the kind that your subject property has
you could make that adjustment pretty easily by just taking that $8,000 value
and then adding it to the value of those comparable properties that you've found.
Or likewise, if that same comparable property had a pool worth $30,000, but your subject
property does not have a pool
then $30,000 could be subtracted from the comparable property.
Now, one thing to keep in mind as we're on this whole topic of finding comparable properties
and particularly sold comps, is that in most states in the US, it's not too difficult to
find these kinds of sold comparable properties on websites like Zillow or realtor.com
or a number of other similar websites.
But there are some states out there called nondisclosure states.
And in these nondisclosure states, the recent sale prices of comparable properties
are not available to the public.
Only licensed realtors have access to this data through the MLS in their market.
So if you're trying to find sold comps like this in a nondisclosure state, you're probably
going to need to get assistance from a licensed agent who has access to the MLS
and can get this data for you.
What if you can't find any comps for your property in your area, either because
you're in a nondisclosure state or because the comps simply don't exist,
there are no similar properties that match your property close enough.
Well, another option is to use listing prices instead of sold prices.
These numbers are going to be a lot less useful because the listing price of a property could be
a whole lot higher than its true market value because that number is a reflection
of what the seller hopes to get, not what they're actually going to get.
Listing prices can also be lower than true market value too
reflecting a low-ball price.
if the seller is trying to start a bidding war or sell the property really quickly.
So a listing price is definitely not the most accurate measure of a property's true market value
but again, if the sold cops in your area simply don't exist, you may have no other option
than to just use what little information you have available and then make adjustments
to account for that margin between the asking prices and the selling prices in your area.
It's also important to remember that sold comps are technically a reflection of the past
not what's happening today.
In order to understand the current market, an appraiser has to take a look at comparable pending sales
to understand what buyers are willing to pay right now.
In a rapidly increasing market one might see pending sales getting bid up at higher prices
while in a declining market one could also see listings not entering into a contract at all.
Ordering an appraisal from a licensed appraiser is usually the most reliable way to figure out
your property's current market value.
But the problem with an appraisal is appraisals cost, money and time.
And sometimes this can be problematic especially if you're a real estate investor
and you're trying to make a dozen offers a day.
It doesn't make sense to try to get appraisals on every single property before you understand
the value well enough to make an offer.
You need a faster ways so you can do this right now on your own.
And it's also important to understand that even an appraisal isn't guaranteed to be perfect
or accurate.
When I used to work in banking, I remember seeing commercial appraisals come out
sometimes hundreds of thousands of dollars different from one appraiser versus another appraiser,
simply because they were looking at different comparable properties to come up with their valuation.
So, the comps that you decide to use will absolutely have a huge impact on whatever
appraised value you or your appraiser come up with.
Using good appropriate comparables can absolutely be an effective way for you
to figure out property values at no cost to you.
As long as you understand what makes an appropriate account for your property
and you know how to make the necessary adjustments
so it reflects the most appropriate comparison.
Do you want to learn more about how to find good comparables in your market?
Be sure to check out the full article over at retipster.com.
I'll be sure to link to it beneath this video.
And if you want to expand your real estate knowledge, be sure to check out this next video
and I'll see you there.
Ah, hallelujah.
We're done.