noob question about adjusting comps

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noob question about adjusting comps

Mike B.
IL · Member since 2012 · 29 posts · 9 votes

I'm currently looking to purchase my first home as my primary residence. I've been looking at single family homes in the Chicago suburbs, mostly 3 bed/1 bath ranches. Most of these are beat up REO's that are selling for $40K - $80K and have an ARV around $80K -$140K.

I'm struggling to figure out how to estimate the ARV. I'm not sure if I should pick 3 or 4 comps that are close to being exactly the same, or if I should pick like 10 or more comps that are similar and try to adjust the values for the differences in the homes.

I just don't understand how much certain features are worth. For example, I'm looking at a 3bd/1.5ba ranch right now with a 2 car detached garage. There are a lot of comps that are 3bd/1ba with a 1 car attached garage. Can I use these, or are they too different? I have no idea how much to adjust the price of mine because of the extra half bath and the garage differences. Also, if I find a 3bd/1ba ranch with a full basement, can I use a 3bd/1ba ranch without a basement as a comp? If yes, how much is the basement worth?

I have no idea how much a fireplace is worth, brick as opposed to siding, 1 car garage vs. 2 car garage, etc. And if I find a home that is 1,000 sq. ft., can I use a house that's 1,100 sq ft as a comp? 1,200?

Sorry for making yet another thread about comps. I couldn't find an "official dumb questions thread" to post this :) Thanks very much for any advice.

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Phillip Dwyer
Real Estate Agent · Henderson, NV · Member since 2011 · 1k+ posts · 550 votes
14y

Google "paired sales analysis". I also recommend taking an appraisal class on the subject matter or sales comparison approach.

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  • Daniel Doran
    Real Estate Attorney · Port Saint Lucie, FL · Member since 2012 · 30 posts · 15 votes
    14y

    Mike, you can use any property as a comp so long as you make the proper adjustments to the valuation based on the differences. The key, as you pointed out, is knowing how much to adjust. Unfortunately there is no magic number to give you that answers this question. It depends on the specific area, type of improvement being analyzed, age of the property, condition, etc.

    Your best place to start is to get 4-5 comps within the same subdivision of the property if possible and then go to your local property appraiser website and see how they have valued each property. This is one of those things that you just learn by doing.

    One place to start though is using Trulia.com or Realtor.com to get recent sales in the area. Then determine how much was paid per square foot for each sale and calculate and average price per square foot for the neighborhood. Multiply that number by the amount of square footage in your property under review and you will get a "rough" estimate of value. From there then use your best judgment to calculate differences for a fenced yard, garage, etc.

    Good luck and don't let the learning curve keep you from making deals.

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  • Phillip Dwyer
    Real Estate Agent · Henderson, NV · Member since 2011 · 1k+ posts · 550 votes
    14y

    Google "paired sales analysis". I also recommend taking an appraisal class on the subject matter or sales comparison approach.

    3Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    I strongly recommend you find all properties that could possibly be considered comps. An appraiser will choose only three or four, but you have no idea which. If there are 10 possible comps, and you look at the three highest ones, you'll overestimate ARV. If you look at the bottom three, you're safe, but may (or may not, these days) be underestimating ARV.

    Sorry, but $/sq.ft is NOT a good way to estimate value. An appraiser will adjust values based on size differences, but with a much lower factor than the overall $/sq.ft. from the sales price.

    Numbers of beds and baths don't matter too much. Garage does. Basement does, but its value is only a small fraction of ground floor footage value.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    I would disagree with this blanket statement. If your subject property is 2500 sq. ft., you can not use another home that is 1000 sq. ft as a comp simply because you adjusted for the size difference. You can also not use a 2+1 for a comp when the subject property is a 4+3. Making 2 bedroom adjustments and 2 bathroom adjustments does not make this a comp. I ccould go on and on with examples.

    A comp MUST be somewhat similar enough to be a comp and must also be in a distance range and time range. Certainly a comp that matches the subject property identically in size and bed/bath combos does not count if it is 15 miles away and closed a year ago.

    My advice (in addition to learning how appraisals are done) is to learn your market in and out including knowing what each variety of homes and their combinations sell for. Then, when looking for comps, find the ones with the closest in size, no more than 1 qty difference in beds and baths, within the last 3 months, and within a 1/2 mile radius. If you can not find enough matches, then you go out to 4 months, or perhaps 3/4 of a mile, paying close attention to situations where crossing over freeways or main streets can rapidly change values.

    Several women have been quoted as to saying "size matters". This holds true in comps!

    Podcast Guest on Show #130
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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    As Will mentioned your comps need to be as similar as possible, it's better to have a comp further away and very similar than different and accross the street. You adjustments should not exceed 10% of the comp price, if it does, it's not a good comp.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Yet you also want comps in the same neighborhood. The neighborhood can affect the price, too, even for otherwise identical houses.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Yes, ideally it's 2 in the same subdivision/neighborhoor and one outside but in the area. This is especially true for developing subdivisions, the 4th house sells at 165K, the 5th at 172K the 6th at 184K and the 7th at 185K, the 8th at 187K then the subject is under contract say at 185, which may look like a deal and it would comp out using all sales just sold.....but what happens if that's the last house, the builder goes bust, bankrupt or whatever and you take that last hosue back and find now, it's best price would be 165-170K. This is an example of how sales in the same subdivision influence a subject property and doesn't really relate it to the whole market.

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  • Levi Gale
    Real Estate Investor · Tempe, AZ · Member since 2011 · 102 posts · 27 votes
    14y

    Comps are definitely not easy to do, but after you do enough you start to see how to adjust. Like others have said there is no magic number, but if you have a generous amount of sold homes you should be able to see the adjustments from one to the other. But hell they may have no rhyme or reason you may see two identical remodels sell for different amounts. Why? Probably because two separate parties sold them, and they sold them at the price that made sense to them. Not all investors squeeze every dime out, in fact I will go out on a limb and say many list under what it could appraise for. It’s hard to be right on the money, but many can do that and they can do it very well

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  • Daniel Doran
    Real Estate Attorney · Port Saint Lucie, FL · Member since 2012 · 30 posts · 15 votes
    14y
    Originally posted by Will Barnard:

    Will I agree with you and should have been more specific. Properties that are drastically different would give a variance that is way out of whack. I meant any similar property.

    Also sq/ft, bed/bath differences depend on your location. In FL I have seen the same exact houses in the same development two blocks apart appraise for a $25,000 difference because one had 3 bedrooms and one had 4. The rest of the floorplan was basically identical.

    The best advice everyone has given you is take the time to educate yourself.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Just to be clear, the quote above was not written by me, it was a quote I copied in my post .
    Daniel - I have experienced that very same thing here in CA too. That 4th bedroom could, at times, be more valuable than one with 3, and in other instances, a very minor difference.

    Thanks for being clear in your follow up post, we are on the same page.

    Podcast Guest on Show #130
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  • Mike B.
    OP
    IL · Member since 2012 · 29 posts · 9 votes
    14y

    These replies have been very helpful. I think that reading the article "JScott's guide to estimating ARV" (which is extremely valuable to anyone starting out in REI, IMO) along with studying the appraisal process will really make analyzing deals easy for me. Thanks again!

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