How To Determine Property Value ?
Real estate comps are one of the most common and reliable ways to assess the value of your property after you’ve renovated or rehabilitated it. Let’s discuss how to use them, how to find them, and how to confidently arrive at a great offer price for your property.
A secret of successful property investors is finding the right purchase price to maximize potential profit. This is a number’s game: a careful balance of market analysis, intuition and cautious planning.
One of the most common and reliable ways to determine an offer price that is low enough to see a large potential profit margin yet is at the same time competitive enough to win you the bid, is through real estate comps. Perfecting the strategy of using real estate comps to reach that ideal market price comes with extensive research and experience.
In this article, we will guide you through the steps of using real estate comps to estimate property value, provide you with the resources for finding comps, as well as examples, so that you can confidently arrive at an offer price that maximizes the potential profit of your next project and beyond.
What Are Real Estate Comps?
Real estate comps, short for “comparables”, are homes that are located in the same neighborhood and are similar in size, age, condition and features as the property you are trying to buy or sell. Understanding how to find comps will help you determine an appropriate and competitive asking price for your potential investment property.
Here are the 5 features to look for when you compare the home value of similar properties:
Home Square Footage
It is not necessary to find comps with the same square footage as the property you’re working on. This would be close to impossible and make this research-intensive phase longer and more difficult than necessary. When you compare square footage, properties that are considered acceptable comps should come within 25% of the square footage of your potential purchase. So if your property is 1,500 square feet, look for comps in the 1,125-1,875 square feet range. Anything bigger or smaller will skew your averages.
Bedrooms and Bathrooms
For real estate investors, the number of bedrooms and bathrooms is of utmost importance, especially when combined with the square footage. For example, there could be a 2,000 square foot house with 3 bedrooms and 2 baths, while there could be another house of similar size but with 5 smaller bedrooms and 4 baths. Those two properties would be valued differently if they were in the same neighborhood.
Thus it is critical to find homes in your area with the same number of bedrooms and bathrooms to help you more accurately determine the offer price. If there aren’t any recently sold homes in your neighborhood with the same number of bedrooms or bathrooms as the property in question, consider the property’s amenities to make up for it.
Amenities are any features of the home that add or subtract property value, depending on the type of buyer you plan to sell to. As mentioned, finding properties with similar amenities is especially important if you had challenges identifying homes with the same number of bedrooms and bathrooms. Big backyards, property space to add an expansion, recently updated bathrooms or kitchens, a swimming pool, higher-end finishes and materials and walk-in closets all add to the value of the house.
Also keep in mind that a property’s amenities should line up with the overall feel of the neighborhood. If there are mostly growing families in a neighborhood, then a big backyard or easy access to a community playground might be important.
As a property investor, you are not just investing in the property but also in the neighborhood. A lot can change from one neighborhood to the next. As a result, a home’s location almost always impacts the home’s value (and your potential ROI). When evaluating the neighborhood, ask yourself the following questions:
Who will your neighbors be? Is the area mostly first-time home buyers, retirees, or college students?What is the neighborhood like at night? Is it a place you would feel safe?What is the noise level like during the day, on the weekends and at night?Do the homes around you have scheduled lawn maintenance, and if so, is this something you’ll be willing to do as well?Are most of the residents renters or do they own the home?Are the homes on either side of the subject property well-maintained?
While potential buyers might primarily be looking at your property, they will also want to know who they will live next to. Neighbors can potentially make or break a deal for buyers. They could pass up a house they love for one in a different area if they are uncomfortable about the neighborhood.
Recent Sale Prices
When you find a handful of comps that are similar in square footage, bedrooms, bathrooms, and amenities, it’s time to find out what they were priced at and how long they stayed on the market. This will give you an idea of the price bracket you need to stay within to be competitive with the other homes on the market and maximize your ROI. When looking at sale prices of homes in your area, you must consider more than just the final sale price. While location, proximity to great schools, and overall condition of the home play a significant role, the other major factors that can significantly impact the sale price include: Supply and demandInterest ratesEconomic growthHomeowner upgrades (i.e. additional bathrooms, for example)Growth potential (i.e. can you add a second story or a guest house on site?)
How to Determine the Home Value Using Comps.
Now that you know the 5 key features to look for in real estate comps, here is how and where you can leverage that information to estimate the property value for your next investment.
Search Recently Sold Listings
Your first step in finding comparable properties is to search recently sold listings in your area. The key word here is recent, which usually refers to homes sold in the last 6 months. As a reminder, you will want to make sure the comps you’re looking at:
are in the same neighborhood have similar features are approximately the same square footage, and are of similar construction
While there are plenty of useful online resources that you can use to approximate home valu