Choosing comparables to help you determine the ARV

Discussion in 'First Time Investors' started by Sophy W, Oct 12, 2016.

  1. Sophy W

    Sophy W Member

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    written in collaboration with Mary Hirsch

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    Finding true comparables to support your ARV calculation can be frustrating, but it is critical to your project calculations before you buy in.


    Knowing how to value a deal is one of the most vital skills in real estate investing. Before you buy, before you even decide on your purchase price, a key determination is the ARV (After Repair Value) of the property. A good ARV depends on choosing and evaluating good comparables. But how can you overcome the roadblocks you may find when searching for comparables?

    Focus only on properties that are similar to your property of interest

    The best comparables are those that are the most similar to this property in both description and location. Ideally a comparable property will be

    • located in the same neighborhood,
    • have sold in the last six months,
    • have a description that is close to yours in the key elements: square footage, number of bedrooms and baths, garage, etc.,
    • be similar in type and style to yours (brick vs. wood, etc.), a
    • even be in a similar condition to yours.​

    Then, drive by the comparable property and get at least a general idea of obvious condition issues at the time of the sale (old roof, peeling paint, etc.)

    What is NOT a comparable?
    • Different number of bedrooms and baths – for instance, locally, three bedrooms are in a different market segment than four bedrooms. One, two or more bathrooms is significant.
    • Square footage also divides markets into segments, aside from the number of bedrooms. It is possible to cram small bedrooms into a small space, but that will not attract a four-bedroom buyer to a house that is very small in comparison to other four-bedroom houses.
    • Too far from the property of interest. Being in a different employment area and school district can change average market values.
    • Sold too long ago. Especially in the fast-growing local community, conditions behind the sale have changed, even in less than a year.
    • Any other factors that make another property significantly different from yours in the eyes of buyers.

    How do I evaluate my ARV from the sale price of a comparable?


    Once you’ve chosen a comparable property, note the specific differences you can identify with your property of interest. Would those difference make a positive difference, negative difference or no difference to what a buyer would pay – and by how much? The more comparables that are a reasonably close match to yours, the more data you’ll have for an accurate estimate of the ARV.

    So, how do you translate a comparable sale price into an ARV for your property? An easy place to start is to simply go by price per square foot. Although this is a useful benchmark in real estate at a macro level, on a property-by-property basis you must then adjust the price for the important differences between the properties. You can apply those adjustments to the total ARV price calculation, if that is easier than adjusting small dollars on the price per square foot.

    What can change the per-square-foot price a buyer will pay, property to property? Is there a big difference in square footage or lot size? Is one property on a corner lot, the other not? Ease of access to a main road; updated and upgraded features; many items found in the listing information or online can help you evaluate the differences with your property of interest.

    These are subjective evaluations and often depend on what is important in the local market and what is not. Assume that buyers don’t pay more for any feature that is included in most average sales in the area. For example, if most of the comparables have a fireplace, that’s part of the average property and did not add anything to the sales price. Not having one might make yours a bit harder to sell.

    Of course you still do not have the inspector’s report for your comparable, or the true condition analysis at the time of the sale. It is rare to have that information when assessing comparables, unless you can personally get the information from someone who was close to the sale. Do a drive-by and look for indications that will help you compare at least the apparent, probable property condition at the time of the sale.

    If you’ve found a comparable with a sale price that is well out of line with the others, discard it as having factors unknown to you that are affecting the price. It’s not really a comparable.

    How comparable? Same neighborhood, similar size and features ... but brick vs. wood.
    [​IMG] [​IMG]
    Learn what the LOCAL price difference is between brick and wood exterior, and adjust the comparable value accordingly.

    What if it’s hard to find a close match?

    What if you aren’t finding good comparables? What if -
    • you just can’t find recent sales, or if
    • none of the sales you do find really match the property you are considering, or
    • recent sales of similar properties are located far from yours?​

    Before purchasing a flip project property that doesn’t have good comparables, ask yourself why there would be few sales in the nearby area of similar properties. Could be that -
    • your home’s criteria does not fit with the neighborhood (size, bedrooms);
    • it is not in a desirable school district or employment area;
    • the neighborhood attracts few buyers for any of various reasons.​

    Also check that you haven’t simply made an error in your search criteria.

    Don’t just give up in frustration if you can’t find recent comparables. To guesstimate an ARV and do the project anyway could prove costly. Talk to people who know the market and try to understand why you are not finding comparables. It is critical to understand what that means for pricing, marketing and selling your property.

    MLS

    If you do not have a realtor’s license to access MLS, a real estate agent working with you to sell the house after rehab can help you gather MLS data on comparables. The MLS data is invaluable as it includes sales price, a good list of property features, as well as days on the market and other important information.

    Be aware that MLS may not have many clues to the property condition or to contract provisions that could affect the price. And you will not know if the property was sold among family members, or if specific discounts were given.

    MLS does not have 100% of property sales, just those marketed and sold through a realtor.

    No access to MLS

    Here are two methods to help you find useful information without MLS. Neither provides sales prices of properties in Texas, but with some diligence you can get an idea of market values.

    Keep in mind that the value of information from online sources is based your interpretation of the data you find, and may not represent all of the factors in the sale of that property.

    The Brazos County Tax Property search site gives you access to useful information such as the last sale of the property and the tax appraisal value. Often it will identify if a transfer of ownership was a foreclosure or a family member transfer. Sales prices are not listed, but the appraised tax value can normally be counted on to be 10% to 20% below market value assuming the property is in average to good condition.

    Zillow.com and Realtor.com are two other alternatives, and you may find value in other online real estate sites as well.

    No non-MLS site lists the sales prices of properties in Texas, as that information is not shared beyond the MLS in this state.


    Zillow and other real estate sites often include a good deal of key relevant information about properties sold in the last few years, including square footage, lot size, number of bedrooms and baths, and many individual property features gleaned from property listing information.

    Either Zillow or a general internet search on the address of a recent sale will often turn up online photos of the interior and exterior that were posted on realtor or other sites while the property was for sale.

    Be warned: Do not place much value on “zestimates” of property value provided by Zillow. “Zestimates” are a programmed calculation and are not based on an analysis of the individual property. Studies have shown “zestimates” to be as much as 20% to 40% different from actual sales prices over time.

    Days on the market

    Days on the market is a critical piece of information that is missing from non-MLS sources for properties in Texas. It is important to move your own flip property to a homebuyer as soon as you can to minimize the carrying costs, so you need to know how long it took your comparables to sell.

    Zillow shows listing information including start and stop dates, asking price and price changes, which can help you get an idea of days on the market.

    continued next post ...
     
  2. Sophy W

    Sophy W Member

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    ... continued from the above post

    FSBO properties

    Online and MLS sources miss out on FSBO properties. You may find evidence of a sale in the tax database, but no details or price. In any case, you can just assume that FSBO’s won’t represent average sales prices for your purposes. Most investor transactions and other discounted as-is sales of properties with sub-standard conditions are FSBO’s.

    Comparing details

    So how can you know the important details of a comparable sale? Does it have a new flooring and fresh paint? What are the countertops made of, and so on? Fortunately, many features are listed in the detailed descriptions on MLS, Zillow, Realtor.com and others.

    Many online sources such as MLS and Zillow include the listing photos! These online photos are invaluable for a comparison, even though we know things were “prettied-up” to make the best impression. Look for style cues, as well as for things like fireplace mantles and sliding glass doors. Get an idea of the layout and overall impression. And take note of the dramatic difference that properly-done staging can make on a first impression!

    How far back in time should I look for comparable properties?

    Although sales going back a year is ok, ideally you want to find comparison sales from the last six months. Earlier sales are not always a good benchmark, especially in a community that is growing fast and adding roads, businesses and schools – or one that is experiencing a downturn. Over the course of a year things can change for good or bad that affect property values.

    Just to illustrate, a couple of local examples of such changes in market value are affecting nearby homes even now. In Bryan, the section of Highway 21 north of downtown between Rudder Freeway and Texas Avenue, has been widened and improved in the last six months, bringing developer interest and rising per-acre values to properties to the north. Conversely, a massive school-district change has upset many homeowner-parents in College Station who do not view the schools as equal and wish they were in other districts.

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    Baltimore row houses - the perfect comparables?
    Corner units; distance to bus and subway stops; interior amenities still count!

    How far away should I look for comparable properties?

    Again ideally, comparables will be in the same neighborhood, or in a nearby neighborhood. Once again, if you have problems finding similar properties that sold near yours, pay attention to the details of “why”.

    Whatever properties you select, also look closely at location factors other than proximity to your property. “Location” is about convenience to the things that matter most in this market, as well as being near similar and higher-property-value neighborhoods.

    • Do your comparables have a similar driving time to employment centers, schools and shopping? Are those destinations considered to be of equal or better quality than what is near your property of interest?
    • Is the comparable located about the same distance from major highways and downtown areas?
    • Are adjoining neighborhoods a fairly close match to the one the property is in – or better?

    Factors that will make my property worth more or less than a comparable

    Details that make a house more livable, comfortable and convenient on a day-to-day basis matter the most. Buyers will pay more for things such as an attached garage or an updated floor plan. They like fresh paint and carpet and newer appliances. Outside of the house, the yard, and even neighborhood sidewalks and nearby parks influence what a buyer is willing to pay.

    Keep in mind that some details that can bring down property value are easily repaired or modified, from cracked windows to broken cabinets. But others, such as an awkward floor plan, or a difficult access to a main road, are more permanent aspects a buyer knows they will be living with for a long time.

    Don’t discount local knowledge

    Once you’ve had some experience assessing comparables and ARV’s and completed some successful projects using those numbers, it’s easy to think “I’ve got this down! I can do this anywhere!” But be careful of falling into a trap of making easy assumptions without really knowing the local area!

    Most real estate investment flip projects are quick, in-and-out projects lasting only a few weeks. There is little time for an economic change to make much difference. But on the other hand, if a major employer or a nearby school suddenly announces a closing during the middle of your project, property values can drop quickly as buyers suddenly back away from an area.

    It could be that “everybody knew” this was coming – but you! If you are searching for comparables outside your familiar environment, pay attention to local newspapers and news sources, and don’t forget the “letters to the editor” where locals blow off steam about changes in the city.

    How do I protect against mistakes?

    One mistake you cannot undo is paying too much for a property! That can easily happen if you miss on your ARV and end up selling for much less than you anticipated.

    Decide your profit margin. Then do your ARV calculation based on your comparables. Work up your estimated rehab costs, carrying costs, selling and all other costs.

    And then, once all those calculations are put together - add another good chunk of change to serve as soft landing for any mistakes you have made. Count on it – something, maybe more than one thing, will not go as planned. Only then, determine your maximum buy price and stick to it. It is better to walk away and miss out on an opportunity to lose money than it is to take a chance on numbers that have little room for mistakes.

    No one is above mistakes. Successful, long-term investors reserve extra profits in case rehab costs run over, or should the property sell for less than anticipated.

    And the ultimate bottom line on your purchase decision:

    Don’t buy into contracts just to have a project going. You have to make the numbers work. If you feel uncomfortable with the precautionary profit cushion in case of mistakes in your estimates of the ARV and rehab costs, then the best decision will be to skip this particular deal and keep looking till you get the one that works for you.

    No matter how you choose your comparables,
    • the more properties you can find that are similar to yours and located nearby, and
    • the more thorough, accurate and complete your information, and
    • the better your analysis and interpretation of that information,
    the better you will be able to estimate a sound ARV, come up with a good buy price and produce a successful and profitable real estate investment flip project.


    What would pointers would you give a new investor based on your own experience? Are there things in the article you disagree with?

    Register to post a reply! Just below is the box “Write Your Reply”. Type in your answer and then click “Post Reply” to the lower right.



    [​IMG]
    This house has comparables!
    IF it is in a neighborhood of similar houses,
    and IF one or more has sold recently.
     

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