How Do I Comp A House? Real Estate Comping And Home Value Comps Explained.
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Originally Posted On: https://dfw-hardmoney.com/how-do-i-comp-a-house-real-estate-home-comping/
How to comp a house – When comping real estate, we look for a deeper understanding of what affects pricing and why no property has a set singular value.
This article sets about trying to answer the following questions:
- How do I comp a house?
- What are the most important things to know about comping real estate?
- What matters most when comping a house?
- The main factors in comping a house are what?
Location Of The Comp
Location is the most crucial aspect when comping a property. A property is worth what a willing buyer will pay a willing seller for it.
Locations can be desirable for any number of reasons.
- Local schools
- Proximity to work and play,
- Community improvements
- The similarity of property profiles
- Topography of the area
- Aesthetic values -trees and underground powerlines.
Negative location attributes can affect value. A house on a busy road is typically undesirable because of noise or perceived safety concerns.
A home facing or backing up to a manufacturing property, apartment complex, properties of lower value, or train tracks can have lower values.
Comparable Sales Are Key To A Good Comp
Using comparable sales from the same location is important. National real estate market trends & real estate sales information will help with this.
Ideally, the subdivision is used as the geographical area. Houses sell according to similar houses within the subdivision. A large subdivision can have varying values across it, so it is often preferable to pull the comparable sales from a smaller section of the subdivision around the subject property.
Suppose the subdivision is too small or does not have enough real estate comps and sales. Therefore, it will be necessary to search for the most similar comparable sales outside of the subdivision but as close to the subject as possible. Ensure not to cross any major roads or into substantially different neighborhoods.
Every property has multiple value possibilities. Different valuations in properties are in major disrepair, clean but completely outdated, somewhat updated, rehabbed poorly by an inexperienced rehabber, and rehabbed with quality materials and craftsmanship.
House comps – It is vital to run the comparative analysis based on this criterion concerning the subject property & comparable sales data.
Listings vs. Pending vs. Sold, and days back for comparable sales.
Market stats tell what is happening in the area, whether people are moving out or in, the owner/tenant make-up, inventory level, days on the market, and more.
Suppose there are a lot of active properties in relation to the number of pending and sold properties over the last six months that indicate a cooler area.
A hot zone is characterized by a few active listings, some pending listings, and a lot of sold listings. Pushing for higher ARV’s is more reasonable in a hot area with less inventory available.
Comparable sales should be no older than 180 days before the current date.
Appraisers target comparables within this time frame. 180 days helps to show a clearer picture of how the current market is pacing and its trajectory.
When good comps are not available within 180 days, going back 360 days may be acceptable.
Size Of The House Being Comped
Does square footage matter when comping a property? Yes – The square footage of the property is typically the next most important factor.
In most home sales, the listing price is determined by taking the price per square foot of similar-sized comparable homes in the area as mentioned above and multiplying that number by the subject property’s square footage.
For example, let’s say a house in Charlotte NC is 1800ft.
We would select comparable sales in the same subdivision, around the same age range, within 200ft +/- of 1800ft (1600ft-2000ft).
The price per foot of the most similar three comparable sales would then be multiplied by 1800 (1800*150 = 270,000) to arrive at the estimated value, considering the notes from above in location.
Location & Average Home Size
Every location has an average home size, and the average price per foot of value settles around that home size. A small house in a neighborhood of large homes will sell for more per square foot than the average house is selling for.
The small home is the lowest entry-level into the desired location, and most buyers want to be in the most desirable location, driving up the price on the smaller home.
In contrast, the most prominent house in a neighborhood will sell for a lower cost per foot than the average home in the neighborhood.
Buyers usually don’t want to pay top market in a lesser neighborhood when they could spend that same amount for less house in a better neighborhood, driving the price per foot down on the large house.
The size of multi-level homes can play a role in value. In most single-family neighborhoods, buyers find it undesirable to have a two-story house below a specific size. If a house is two stories and less than 1500ft, it can be challenging to sell. The house feels small and cramped, with 900ft downstairs and 600ft upstairs compared to a single-story house of 1500ft.
There is no hard and fast rule for the size ratio, that can be neighborhood-dependent.
Of course, there are instances where this type of floorplan arrangement is the norm, a four-story townhome, for example.
Comping Bedrooms & Bathrooms
Bedrooms and bathrooms should be similar to the comps for the size of property you are comparing. If a subdivision has primarily 5/3/2 and 3000ft houses and the subject house is a 2/1/1 at 3000ft, its value will not be comparable to the 5/3/2 at 3000ft. There will be significant value deduction for fewer bedrooms, bathrooms, and garage spaces, and the desirability drops dramatically.
Lot size should be noted, though larger lots and corner lots do not necessarily equate to a higher value outside of new home sales. It may be a salability factor where buyers would choose one property over another but not pay more for it.
Rural lots of an acre or more affect value, and one acre compared to five acres will have a substantial difference in value.
No matter what type of property, comparable sales used for value analysis should have similar lot sizes.
The Age Of The Property
Does the age of the house matter when comping? Yes – Age is one of the more important aspects of comping properties.
Keeping the age as similar as possible is essential. That range can be dependent on the neighborhood, and the year the property was built.
There can be circumstances in which the age range should be plus or minus five years of the subject property, and other times fifteen years is acceptable.
In some cases, a new home is worth more than an old home.
In other cases, an old house is worth more than a new home.
For example, a new home built in an affluent historical area of town, in which the appeal is an old house, maybe worthless if the construction is not similar to the historic home.
The buyers want a historical home, not a track home, and not a modern home. Conversely, buyers want a new home with new systems in a new subdivision with all new homes, and an old home will be undesirable.
Older Properties Can Cause Headaches
The older a property, the higher the risk of headache and loss of money.
Older properties have older systems and are more likely to need hidden repairs, driving the rehab cost up.
City code requirements change over time, and while many items may be grandfathered in if you leave them be, once you tear out a wall and expose them, you may be required to bring a system or entire property up to code.
Old systems may include electrical, roof, HVAC, plumbing, framing, windows, insulation, or the lack thereof.
Water damage and termites are likely to be present. Aluminum wiring is problematic in some properties built from the 1960s to the mid-1970s. Roofs may have composition shingles over wood shingles and require complete removal and new decking for an insurable property—the older the property, the higher the repair costs and higher the probability of hidden problems.
The Price Range Of The Home Being Comped
Price range is the next defining target for a house comp.
Lower price points are affordable to more people, and easier to secure financing in a traditional mortgage. They also offer more options should the market have a swift downward correction.
Affordable homes can convert easily to rentals or be sold as owner finance transactions.
Jumbo loans, over the conforming loan limit, require 20% down and carry more stringent qualification requirements. The conforming loan limit for 2021 is $548,250, and jumbo loans are loans over that amount.
Regarding size, we discussed how it affects the price and how smaller homes in a given area sell better than the largest home in the area. That applies to the price range as well, and the neighborhood’s low to average price point will sell better than the highest price point for the same reasons mentioned.
The higher the price range of the property, the more particular the buyer is.
Unusual Design Can Be A Big Factor Of A Comp
A house with an unusual design can be hard to sell, which is often due to unknowns.
A house with a flat roof, for example. Most people are unfamiliar with them but know they are more prone to leak and are more expensive to replace. Practical issues like a lot of steps or stairs can make a house hard to sell.
Most people are okay with stairs but not in excess. People are relatively irrational, and they compare similar properties to make a choice.
This can make modern homes, log cabins, or other structures dissimilar to the area challenging to sell and determine value. A log cabin in Fort Worth, Texas, is difficult to sell and appraise as there are not many log cabin properties, but they are most desirable in the mountains of Colorado.
It is important to know the home design characteristics in the area you are analyzing.
As humans, we make decisions based on relative comparison to something else.
For example, we have a buyer looking at three houses. A nice modern house, a dumpy colonial house, and a lovely colonial home. They will typically dismiss the contemporary house because there is nothing to compare it to, and then compare the two colonial houses and choose one of those.
Multi Family Values & Comparable Sales
Multi-family properties, residential 2-4 units, are valued by comparable sales and rental income from the appraisal and lender perspectives. In reality, like all real estate, values are driven by supply and demand.
When the market is hot, and everyone wants to be a real estate investor, the values of these types of properties increase dramatically.
When the market is terrible, they can drop by as much as 50% because no one wants to buy this type of investment property in those times.
Banks that finance these properties want to see a DSCR (Debt Service Coverage Ratio) of 1.20%.
That means the ratio of the rent to the payment.
They want the property’s net income to be at least 1.2 times the cost of the loan. When the market is hot and prices are high, buyers have to bring larger down payments to purchase or refinance the property.
How do I comp a commercial investment property? There are many types of commercial properties and many ways to evaluate and value them. They are primarily investment-driven, and values are derived from the property’s net income concerning the standard cap rate for like-kind properties in the area.
Commercial property types include residential 5+ units, warehousing, office buildings, manufacturing facilities, food services buildings, retail, medical, etc.
They can range in value from thousands to billions of dollars.
Evaluating these properties is much more complicated, and that is why we require appraisals.
Commercial appraisers pay for access to data that help determine value. They do a deep dive into the property and the similar comparables they can find, and it takes a great deal of time.
Market forces and the overall economy can affect commercial values as they affect lease rates. At any given time, some commercial real estate segments may be suffering, and it is important to know which those are.
Land development and construction development projects can be complicated to underwrite.
So one must consider lots of factors, including – local and federal construction and compliance requirements, city approval of plans, neighboring property owner’s approval of zoning changes, timeframe, leases, or sales already executed in advance and ready for property completion, and many other factors depending on the individual property type.
Stigma And Other Factors Considered As Part Of The Comp
A stigma means the property has negative qualities or perceived negative attributes that can affect its value and what a buyer would be willing to pay for it.
Death on the property will prohibit some buyers from wanting it for any number of reasons.
Flood Plain properties.
Fire-damaged properties usually require the highest level of renovation, the most government oversight, and carry a stigma in the market as most buyers don’t want to own a previously burned home. The repairs often exceed what rehabbers think. Just getting the smoke smell out of the house can be a significant hurdle.
Mold can be harmful depending on the spore type, how much is in the air inside the property, and the individual allergies of a specific person. In large, most people would prefer to stay away from mold because of all the negative media and legal action around it, leading to a possible lower value.
Hazardous properties or properties with hazardous materials in them can carry a stigma and cost more to renovate. For example, a property used as a meth lab would fall under that category.
Many people may not want to own a property that has been a meth lab.
Comping A House – The Short & Sweet Version – Comp In A Nutshell:
As you can see, this is a lot of information with many factors to consider when analyzing any given deal.
This is just a quick synopsis to boil down to basics for easy understanding.
There are additional factors, and we could go on and on, but I think this gets the point across.
It takes years, even decades of experience, to gain the knowledge needed to analyze house comping & real estate deals properly.