How to Quickly Find Real Estate Comparables (Comps)
Real estate doesn’t exist in a vacuum. As all seasoned investors know, the greater real estate market can play a significant role in how much a property can demand when up for sale or rent. As such, a comparative market analysis is generally a key step in the process of preparing a rental property or fix and flip property for the market. This is also true for investors preparing to make a purchase, be it a single-family home or a multi-family rental unit.
However, a comparative market analysis isn’t always as straightforward as it sounds. This kind of report requires doing legwork and finding relevant comparables, or comps. All comps aren’t made equal, either; some are better than others, and without the right comps, this kind of research is virtually impossible.
If you’re preparing to list a property, whether for sale or as a rental unit, finding comps quickly – and accurately – is an important task. This is what you need to know to best find comps for a reliable comparative market analysis.
What Are Comparables?
As the same implies, comparables are other real properties in a specific area that sold recently and have many of the same characteristics as the property you own or are considering buying. For example, if you are evaluating a two-bedroom ranch home with one-and-a-half baths, a good comparable could be a home that sold two weeks prior with the same number of beds and baths.
In determining comps, it’s important to be able to break down these three elements:
- What are the key features of a home, like the number of bedrooms, number of bathrooms, and land area?
- What is the relevant area in which to consider sales?
- What is the condition of the home, such as whether the home is move-in ready or requires either aesthetic updates or significant repairs?
- How recent should sales be to provide an accurate picture of the market?
The features of a home will vary from one property to the next and may also depend on real estate trends in a given area. In general, comps should be similar in size, style, land, and the number of rooms, as well as construction date, condition and style.
To some extent, what can be considered a good comp can be discretionary – what one investor or homeowner sees as the most notable feature may differ from another – but in general, as many matching features as possible is best. Keep in mind things like finished basements and other things buyers tend to look for: a home on five acres with a finished basement probably isn’t comparable to a townhouse without a finished basement, even if other market features, like the number of bedrooms, is the same.
What can be considered a recent transaction can also vary, but most experts suggest around three months. However, if the market has changed drastically due to something like an economic slowdown, looking back no more than a few weeks to a month might be necessary for a realistic picture. Alternatively, if the market in your area has been stable for a long time, going back six months, for example, may not be inappropriate.
Area can also be very relative, depending on the location, the number of sales, and the demographics of the surrounding region. Take, for example, a neighborhood that straddles the border of different cities. A house a few streets away may not be a good comp if it’s in a different school district. In this case, careful analysis is required to make sure the dynamics of an area are fully understood. However, in a more rural area in which all homes are similar, many residents may work for the same large employer, and there’s one school district serving the whole community, a comparable area may be larger in size.
The condition of a home should also be taken into account when evaluating potential comps. If an investor is considering purchasing a fix and flip property, the comp analysis should focus both on other properties that also needed repairs in order to determine the appropriate purchase price for the property, and on fully remodeled homes in order to estimate the After Repair Value, which is the price at which the investor can expect to sell the property after repairs are completed. The investor can then evaluate the expected purchase price, repair costs and After Repair Value to get an idea of the potential profit margin on the fix and flip property.
Comps can include current listings but may also include expired listings. Expired listings won’t necessarily indicate what pricing should be, but rather what it shouldn’t be. After all, most listings expire because they are priced inappropriately for the market.
What Is a Comparative Market Analysis?
A comparable market analysis, also called a CMA, is a critically important research tool for real estate investors. A CMA provides context for the current market by analyzing comps and determining pricing for a purchase or sale.
Performing a CMA involves taking comps and using them to determine a high price point, or a ceiling price, and a low price point, or floor price, based on relevant transactions. Then, using the unique features of the property you are considering, you can build up or work down to properly identify how your investment fits within the context of the market.
Comparative market analyses aren’t grounded in exact science but finding the most relevant comps can be critical to ensuring an accurate end result.
How to Quickly Find Real Estate Comparables
Real estate comps are available in a few different forms. In order to be as thorough as possible, it’s best to maximize your options and analyze as much information as is available to determine the best strategy for pricing property.
Reference Official Records
Buying real estate isn’t a secret. These transactions are public information, so anyone can keep up with transactions, regardless of location. Some cities or states are better than others, but regardless, this data is consistently available.
When you start your comparables homework, begin with the official records maintained by the applicable government agency in your area. These are guaranteed to be accurate without any of the value-related algorithm guesswork so many real estate sites incorporate into their listings. From here, investors can determine sales price as well as relevant property features and the kind of location information that will shed light on any notable area-specific details.
Official records are updated as soon as sales go through, too, providing the most up to date information. It may not be convenient – not all government agencies organize material in a user-friendly manner – but you can be sure it’s legitimate.
Check Real Estate Listings
Current listings, or the properties on the market presently that haven’t sold yet, can be a good source of information, too. While these sales are theoretical rather than actual, they can be a revealing look into how other market professionals price properties. Browse for new listings on a regular basis and across as many of the major name real estate sites as possible to monitor market trends in real time. Reviewing photographs of listings can provide information regarding the condition of the property as a factor in the CMA.
Keep an eye on things like time on the market, too. How long a house has sat without being sold can be a valuable indicator of both the current state of the market as well as what consumers are willing to pay. Most real estate websites document time on the market for properties that closed, too, giving you insight into how long properties took to turn over at a particular price point. If similar properties spent months on the market at the same price you’re considering, it may be worthwhile to lower expectations.
Work with an Appraiser
A professional real estate appraisal can be an excellent investment, particularly for properties with unique characteristics that stand out in the current market or are unlike most other recent sales.
An appraiser can also let you know about deficient areas that may not have otherwise been evident. For example, the bedrooms in a property you are considering purchasing or listing for sale may be smaller than the standard in your area, or the property you are considering may be the only recent listing that requires significant repairs or renovations. As such, pricing may need to be lower to reflect this. Things like market conditions, giving you the best possible frame of reference when determining comparison points. Appraisers may also be able to speak to other properties in the area.
Speak with Agents
Speaking with agents may not be a logical step for those seeking easy access to comparables, but there can be advantages to tapping into friends in the industry. Real estate agents have a different perspective than investors and may be able to provide additional details on how the current market is operating in your area.
Agents can be a great source of real estate related data, including the kinds of market insights that may go beyond cold, hard data, like which home features customers are asking about most. In some areas, a redone kitchen may be a priority, while in others, multiple bathrooms may appeal to more buyers. While this isn’t directly related to finding comps, it can be extremely beneficial in helping you to interpret your comps.
Asking agents specific questions can be the best way to get the data you need. For example, what features of a property you are trying to buy or sell might be most appealing to homeowners or renters.
For those in the rental market, available listings and recent rental information may not be as easily available in some locations as with purchase transactions. As such, you may need to browse management company or building websites to get a good idea of rental property pricing for comparable units.
Many management company websites list recent transactions, including units rented and at what price. This type of resource can be valuable in finding comparables for the rental unit market, especially in areas dominated by large buildings rather than smaller properties with independent landlords.
Rental properties, however, are not required to report the same data as real estate sales, so take all information understanding the potential deficiency of information.
The Challenges with Airbnb
Airbnb has made a huge impact on the real estate market in many geographic areas, and often resulting in higher prices. As a real estate resource that works in a drastically different way than traditional long-term rentals, Airbnb is more likely to distort the market than offer any insightful information.
Airbnb users are generally willing to pay elevated prices in exchange for access to a comfortable place to stay for a shorter time. Airbnb properties also tend to be furnished and don’t include charges for exact usage of electricity and other utilities. This can wildly affect what users expect for their investment. A property that lists for $2,000 a month on Airbnb could be as much as 50% less expensive in the traditional rental market depending on the other factors that contribute to pricing. When performing a market analysis for rental units, be sure any Airbnb information you are using is interpreted in the proper context rather than incorporated with traditional rental market data. Also note that Airbnbs are not typically rented out 100% of the month.
Finding and analyzing comparables is a key part of determining proper pricing for real estate transactions. It may not be as fast and easy as you’d like, but combing through properties, looking at ownership and rental strategy, and performing your own analysis is the best way to price properties – whether you’re buying or selling. Your CMA can help you make best use of the market data available in your area, ensuring you’re getting the most money possible out of your investment property or rental unit.
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