Performing comparable sales research on a property you are considering buying is absolutely critical. There is no better or faster way to determine it’s worth on the open market and therefore it’s worth to you. But with all of the data available, pulling the right comps is an art. Here, we’ll discuss general guidelines for finding the best comps for valuing a property.
This is the second article in our series “Valuing a Property.” Read the first article about getting started.
Make Sure You Have MLS Access
Your local MLS is the best place to find comparable properties to your subject property. If you don’t have access you’re flying blind and will not have the data you need to make educated decisions. DO NOT rely on websites like Zillow.com and Redfin.com to value a property. These sites use mostly publicly available data for their estimates, and their algorithms do not take into account all of the factors that are needed to properly value a property. No one has created an algorithm that beats good comparable sales research.
For the purposes of this article, we will assume that you have MLS access and are running your own comps. But if you don’t have MLS access you can learn where to find comparable sales information.
MLS Listing of the Subject Property
Open MLS and first do a search on the address of the subject property. If there is an active listing—or even historical listings, you can tell a lot from them. Save the most recent listing. It will be a go-to document for all kinds of questions about the property. Pay particular attention to the history. This can indicate trouble with a property. How long has it been on the market? Has the price been dropped? Has it expired?
If there is a MLS listing of the subject property, it is the most valuable data that you can have. It can immediately give you ceiling for liquidation value if it’s been on the market for over 30 days in the past year.
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Pulling appropriate comps is the most important valuation step. Comps must truly be comparable properties to the subject property: The same buyers of the comp properties would also seriously consider purchasing the subject property. In some areas, comp properties will be extremely comparable—built in the same year, by the same developer with the same finishes. In other areas, they will be less so. But always, there will be major factors that make the properties truly comparable.
Below are the “Big Six” parameters to use when pulling comps. All of these are absolutely necessary:
1) Sold Date
Probably the most important factor. The sold date for any comp should ideally be less than 6 months from the present date. If there are not enough comps within this range, properties can be pulled up to 1 year. Never use a comp that is over a year old.
In general, properties closer to one another are more comparable than those far away. The further away a potential comp property is from the subject, the more differentiating factors come into play: school district, HOAs, zoning, etc. Below is a list of distance parameters that should be used based on density:
- Dense urban areas: .25 – .5 miles
- Suburban areas: .5 – 1 miles
- Rural/outer suburbs: 1 – 3 miles*
*Rural areas notoriously have few comps and will likely not be able to produce enough data for a valuation.
Usually, a radius measurement around the subject property is sufficient. However, large dividers such as highways and train tracks can dramatically affect property value. Try to use comps within the same enclosed area or neighborhood. In this case, there really can be a wrong side of the tracks. Watch out for it!
3) Comp Status
The status of the comps is also very important. Sold comps are far and away the most important. The more sold comps you can pull, the better: With each sold comp you can become more and more confident about the subject’s value. Below is a list of comp statuses from most important to least important:
- Sold: The most important by far. This is what the market is paying.
- Pending: Somewhat important, especially if days on market is short. Only an indicator though. Actual selling price can vary.
- Active: Somewhat important, shows market supply and what sellers are listing things for. A big inventory of active comps suppresses market value.
- Withdrawn/Expired: Not good indicators. Often something unique is wrong with the property or seller. But high levels of withdrawn comps can show market contraction.
4) Square Footage (SF)
Since property valuations come down to a $/SF calculation, obviously square footage is important. The major thing to remember here is that $/SF falls as the total SF of the property rises. It is always an inverse relationship. A 750-SF house of comparable quality and location will always have a higher $/SF valuation than a 2000-SF house. The key is to find properties of similar size so that this fluctuation is less pronounced. Your goal is to get the average SF of the comps to be as close as possible to the SF of the subject property. Also, remember to use conditioned square footage in your valuations (not garages, porches, etc.).
5) Property Condition
Obviously the condition of a property is a major indicator of value, so you must compare the condition of the comps with that of the subject property. Are the comps remodeled or updated? Are they tear downs? Are they new builds? When were they built?
Below is a list of conditions and their definitions (according to LCI):
- Poor: The property is either a tear-down or needs a total remodel. Not livable with major damage.
- Fair: Livable but still needs a lot of work. Could theoretically be a tear-down, but could also be remodeled.
- Average: The property is in average condition for its age with no major damage. It needs several updates and a good amount of cosmetic work.
- Good: The property looks great at a distance and is well maintained, but it still needs some updates and minor cosmetic work.
- Excellent: The property is either brand new or like new in basically perfect condition with no updates or work needed.
Some MLS systems will let you filter results by “condition at sale.” This is a good tool for speed, but don’t solely rely on it. These conditions are entered by buyers’ agents who sometimes have wildly divergent views of what is good, poor, etc. So read the comments and look at photos to verify.
6) Property Type
Make sure you’re comparing apples to apples. Houses should be compared with other houses. Townhouses with townhouses. Multi-family with multifamily. Land with land. That said, sometimes you can fudge this a little:
- Units on the same parcel with an A/B configuration are generally comparable. So duplex units could be comparable to a house with an accessory dwelling unit on the same parcel. (Although the duplex unit value might be slightly less due to the shared wall.)
- Raw land and tear-down comps are generally comparable. Much of the time the only difference here is that there’s a house that needs to be torn down to get to the land. But pay attention to whether the land has utilities available or not. Running utilities to land is expensive and decreases the value.
That’s it for this part of our series “Valuing a Property.” Check out the next installment: Valuing a Property: Other Important Parameters.