Beginner's Guide to Comping

[Juan Diaz]

Sharing some of the resources I've developed and thought I'd post it here for feedback

Comping

The other element of purchasing a property, regardless of the method, is comping. Comping is one of those funny nicknames for a noun that got turned into a verb. When you comp, you’re looking at comparable houses, all in the name of finding what a house will sell for after you’re done flipping. Look around the neighborhood where the house is located. What are finished houses selling for? What features do they have?

Get on the MLS and look for houses that have similar square footage and numbers of bedrooms and bathrooms that were sold within the past six months. If you can find a house that's finished the way you plan on finishing it with the same number of bedrooms and bathrooms, you've got a pretty good comparable. You want to look for at least three comparables so that your numbers aren't thrown off by one house that received a crazy high offer.

When you're looking at these properties, be honest with yourself. What level of finish will you be able to accomplish, compared to what's available in pictures of the house on the MLS? Unless you're an interior designer, you probably won't be able to replicate the high-end, gorgeous look that many flippers have perfected in their remodels. You'll be able to match it as you learn, but your first efforts probably won't be quite as nice as some of the more experienced flippers.

As you're looking for the properties, you also want to look through their description in the MLS. What are they talking about having? A property with more extensive work done will be worth more than one that has had fewer upgrades, regardless of whether or not they look the same. Another things to watch out for is for bonus space. Many times there is space available in the house that is not listed in the official finished square footage. Basements and attics can be good examples of this—the actual square footage can double or triple the "official" square footage.

Something else to watch out for on the MLS are views associated with the house. Views are hard to quantify, but the same house can be worth significantly more with a good view. Items like original hardwood flooring or original decorative woodwork can also increase value more than comps would seem to warrant. As you're looking through the description of the property in the MLS, you want to be on the lookout for anything that could make this property a better or worse comp. The more you know about what condition other houses were in when they sold, the better you'll be able to predict what price you'll be able to get when you're finished flipping your house.

The comps will let you know what price you can charge for the house. Based on the three most similar houses, calculate a price that you expect to get on the sale of your house. Be conservative. Better to estimate low than high! Keep in mind any extras that other houses had that your house will not, and vice versa. Use that to adjust the expected price on your flip up or down. You’ll go through this practice in more detail in the Finance section.

Remember, the best way to make a profit is to have the most realistic view of what your house will sell for when you’re finished! No one wants to be stuck for six months holding onto a house that was priced too high, or losing money because they spent an extra $20,000 on a house that didn’t need it.

Looking at other houses.

We’ve been over the basics of foreclosure investing, and now it’s time to take some of those tricks that we learned in looking for foreclosures, and applying them to evaluating and purchasing other properties. What you’re looking for from property to property stays the same, what changes is the circumstances in which you can get it done.

When you're buying a house from the MLS, or through escrow or more traditional means, you have more time to examine the house and create a better and more accurate estimate of the work involved. This allows you to come up with a more accurate estimate, as well as allowing you more leeway to negotiate with the selling party.

When you first see a potential property, you’ll want to walk in there with a realtor. Your realtor will be a fantastic resource for letting you know what sort of price you can expect to pay in this condition. They will be able to guide you as you submit an offer that is acceptable to the owner.

As you go through the house on the first walkthrough, look for the same things that you looked for in the foreclosure process. Is there any foundation damage? What is the condition like on the inside? Will you have to replace toilets, showers, cabinets, vanities, or anything on the inside? Is there a new roof or guttering needed? Will you need to replace anything inside or outside the house due to dry rot? Look out for leaks, and any presence of water within the house itself. That’s another big red flag.

Now that you’ve looked through the house, you might be able to come up with a quick estimate of the work that needs to be done. This largely depends on your experience working with contractors or remodeling homes, as many beginning flippers grossly underestimate the costs of remodeling. If you’re an experienced flipper, you should be able to have a rough estimate of price after one walkthrough of the house.

Fortunately, as a beginner there are ways to get around your lack of knowledge coming into the flip. When you’re looking at the house, you can have a general contractor come with you, and have him give you an estimate for all the work that you wish to do. This will give you a real, market-value dollar amount for the work that you’re looking at that you can take or leave. It doesn’t obligate you to anything either.

Once you’ve gotten your estimate for the cost of work to be done, you can submit an offer on the property. Work with the numbers to find out what the maximum price is that you can pay for the house in order to make the profit that you need to make minus the repairs. Once you know this number, you know that you can’t go any higher, and if the seller asks for more, you can just walk away.