Investors know that buying real estate offers an opportunity for tax breaks, building equity, robust cash flow, and it can also provide a hedge against inflation. When you are in the process of home buying, you may hear terms like "real estate comps," so let's get into what that means.
When analyzing a deal, determine the most you can offer and still make a good deal. Assessing the value of a property through comparable home sales (or comps for short) is a crucial factor.
Benefits of using comps in your buying process include:
Knowing the comparables can make the most of any real estate experience. With the right tools, ensuring you have a top-notch deal and finding the ones that best fit your investment style and portfolio goals is possible.
Real estate comps, or real estate comparables, are homes recently sold that have relevance for the kind of property you aim to buy or sell. For example, if you have a single-family home, a multi-family property, or a mobile home, comparing like properties in a reasonable range from the subject property is critical to ensuring the best transaction.
Comps help determine a home's fair market value by comparing sales data. This approach uses substitution to determine what you should pay for a home by looking at the pricing of equally desirable properties. Consequently, the best use for comps is between subject and market properties that are the most similar. Comps can be of service to real estate professionals and members of the general public.
Buyers who intend to keep a property as a primary residence or even reselling can use comps. The valuable knowledge for house hunters may let you sight in on a property and tune your offer appropriately. This tuning helps sort your negotiating strategy when it comes time to approach a final price.
Factoring in the location, condition of the home and scope of any necessary rehab, age of the property, lot size, and the number of rooms are the considerations that can drive a home value.
Home values can be as-is, which means the home value at the date of an appraisal. The appraisal process can be a critical part of the sale of a home, and a buyer's lender will typically initiate this stage to determine the subject property's market value.
The appraisal does not include hypotheticals or any repairs that could alter the home value. That value would consist of the current number of bedrooms, bathrooms, age and design, lot size, and swimming pools and fireplaces. There is also the future value of a home after changes occur, aptly called the after repair value.
If you are purchasing a home to resell to a home flipper that can buy a property in distress for its untapped equity, then the after repair value is (ARV) is vital.
A comparative market analysis (CMA) is a report based on a real estate agent's opinion of value for a property. It is something an investor could independently prepare if they desired.
The analysis lets you see the differences between your subject property and the comparables and assess how the differences impact sales price. This trend is established through research of 5-10 different comps. Moreover, the analysis allows you to be sure you are drawing on a reliable estimate of the property's value.
These homes are currently for sale, and their data is not conclusive enough to determine value. Sellers may be asking a price that buyers are not willing to pay. Nevertheless, they provide valuable information about the inventory, or the total number of homes, for sale on the market.
Days on the market lets you know how fast or slow the market is moving in the area where your subject property is located. Reviewing active comps enables you to see how the competition looks. If you are buying to repair or sell to a wholesaler who will fix and flip, this information is critical to knowing what level of rehab is needed for properties.
Pending comps are under contract, though they have not yet closed. They become the newest sold comps if they close in subsequent weeks. Until it closes, you will not know the actual contract price. However, days on the market are a good indication. When a property goes under contract and sells quickly, it likely went for at or over the asking price.
The focus will be primarily on sold comps. These are where to find complex conclusive data for how much the market paid on properties. 5-10 sold comps allow you to establish a trend for what the competition is doing while determining relevance.
The most relevant comps are the ones that look at properties that are the most like the subject property. How old the comp is and how long ago it sold are crucial to understanding—taking your time to view comps less than a year old aids maximum relevance for investors.
Work with a professional to take advantage of your local multiple listing service. This database provides access to extensive information about homes currently on the market. Since it is a database that sellers use to list homes for sale, you may be able to find out how many days a property was on the market and what sellers asked for it, among other things.
This database allows an individual to do market research, though it is only accessible by licensed real estate agents, so a partnership is best to help sift through the data. In addition, obtaining information from these sources can provide insight into properties similar to the subject property to factor into your picture of relevancy.
Investors may also want to peruse websites that collect information accessible to the public. For example, insights on sold properties can be found in these collections, though getting the most accurate and up-to-date details is more streamlined with a real estate agent.
Investors may opt not to work with an agent and can sometimes find helpful information with some online resources. Comparisons are also possible with the help of county records if you choose to deploy them. There are in-depth dives into characteristics of subject properties there as well.
Understanding the full impact of specific elements of home details can help you get the most out of determining if a home's value fits your investment goals and financial situation.
Establishing a comparative market analysis will help you create the most precise picture of a home's fair market value. These critical insights can give you an edge when buying or selling a home. Handling the price for your own home includes understanding the similar homes in your area. Real estate comps benefit buyers and sellers to make the real estate marketplace a more navigable space.