Analysis of REO/Short Sale Comps.

[GREGORY HARRIS]

How do you evaluate comps for a potential rehab subject property? I potential financial partner and I both evaluated a property and we came up with a significant difference in value.

This is what I was doing: 1. 1/2 mile to 1 mile out. 2. Primarily using the same bed/bath count. 3. Keeping the Square Footage as close as possible, but, not going more than 20% difference. (If there are more comps to choose from. If there aren't, then I will use what is available.) 4. I will primarily go 3 months back. 5. I will use Standard, REO and Short Sales.

The partner said that he doesn't use the number of bed/baths. He only uses square footage. He goes out 3/4 of a mile. He doesn't go beyond 3 months back. He doesn't use REO or Short Sales because, according to him, they are already discounted. He only looks for comparable standard sales, because once the subject property is rehabbed, it will be a standard sale.

My first thought was that just because a property is an REO or a Short Sale, doesn't necessarily mean that it is discounted in market value. The mortgage might be completely upside down, but, the market value that they are selling it for might be appropriate for that particular house, that particular neighborhood and being listed in today's market.

That being said, is it appropriate to omit REOs and Short Sales from the valuation process when looking at a potential rehab? Should I only price comps based on Standard Sales?