Mastering Comparable Sales: A Key Skill for Real Estate Investors
- Chris Goff
- Jun 12, 2023
- 3 min read
Updated: Jun 29, 2023
In the world of real estate investing, knowledge is power. One essential skill that every investor should master is the ability to accurately assess a property's value based on comparable sales, or "comps." By analyzing recent sales of similar properties in the area, you can make informed decisions about your investment strategy and ensure that you're not overpaying for a property or missing out on profitable opportunities. In this blog post, we'll cover the importance of running comparable sales, how to choose the right comps, and tips for analyzing the data effectively.
What is the Importance of Running Comparable Sales?
Comparable sales are crucial for several reasons:
1. Accurate Property Valuation: Knowing the fair market value of a property is essential for making sound investment decisions. Real Estate Investors generally calculate the ‘After Repaired Value’, or ARV. This is what the property would be worth in tip-top shape with all repairs made. Overpaying for a property can lead to lower returns or even losses, while undervaluing a property may result in missed opportunities.
2. Financing Approval: Lenders typically require an appraisal before approving a loan for a property purchase. Appraisers rely heavily on comparable sales to establish the property's value, so understanding the comps can help you anticipate potential financing issues. 3. Negotiation Leverage: Having a thorough understanding of comparable sales can provide you with leverage during negotiations. Armed with this information, you can confidently justify your offer and potentially secure better terms.
Selecting the Right Comps
When choosing comparable sales, it's essential to select properties that closely resemble the subject property in terms of size, location, and features. When determining the After Repaired Value, you must select properties that are in tip-top shape. Here are some key factors to consider:
1. Proximity: Look for properties within a close radius of the subject property, ideally within 0.5 to 1 mile. Keep in mind that even short distances can make a significant difference in value, especially in urban areas or neighborhoods with varying property types.
2. Recency: Focus on properties that have sold within the past three to six months. Real estate markets can shift quickly, so more recent sales provide a better indication of current market trends. 3. Similarity: Choose properties with similar characteristics to the subject property, such as square footage, lot size, age, and architectural style. Additionally, consider factors like the number of bedrooms and bathrooms, as well as unique features like swimming pools or updated kitchens. 4. Condition: Ensure that the comps you select are in a similar condition to the subject property. If the subject property requires extensive repairs or updates, look for comps with similar renovation needs.
Effectively Analyzing Comparable Sales Data
Once you've gathered a list of relevant comps, it's time to analyze the data and draw conclusions about the subject property's value. Here's how: 1. Calculate Price Per Square Foot: Divide the sale price of each comp by its square footage to obtain the price per square foot. This metric allows you to compare properties of different sizes on an equal footing. This is very important when selecting comps.
2. Identify Trends: Examine the price per square foot for each comp and look for patterns or trends. For example, you may notice that updated properties command a higher price per square foot than those in need of renovation. 3. Adjust for Differences: Make adjustments to account for any significant differences between the subject property and the comps. For instance, if the subject property has an additional bedroom, you might add a certain amount to its estimated value. 4. Determine a Value Range: Based on your analysis, establish a range for the subject property's value. This range will help guide your investment decisions and offer flexibility during negotiations.
In conclusion, running comparable sales is an indispensable skill for real estate investors. By carefully selecting relevant comps and analyzing the data, you can accurately determine a property's market value and make more informed decisions about your investment strategy. By mastering this skill, you'll be well on your way to achieving success in the world of real estate investing. REIPro Software has a Comparable Sales tool that determines the after-repaired value in all 50 states using local county records and real-time MLS sales.
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