Finding comps — that is, properties with similar characteristics that have recently sold in the same area — is a crucial first step in evaluating a flip. This is especially true when a property that you consider an ideal flip is located in a city or state that you are not familiar with. In such cases, performing due diligence can seem intimidating. You may even be tempted to sign off on a deal that looks good on paper without analyzing the asking price. We wrote this post for remote investors in both scenarios: to demystify the building blocks of deal analysis, and to provide you the means to determine if a property is worth pursuing or one you should walk away from. In this post we’ll walk through the anatomy of a good comp and the five criteria you must evaluate when finding your comps.
Good Comps – An Overview
The big picture overview of what you’re aiming for when finding your comps is ideally properties within the same neighborhood as the subject, that have the same number of bedrooms, bathrooms, square footage, and general characteristics. You’ll find, however, that it’s often not easy to find exact matches. You might have some properties with more or less of one or the other, and that’s okay because when you do the final adjustments – that is, the reconciliation — you’ll be able to account for those differences price-wise. For right now, however, these are the five criteria:
- properties that have sold within the previous six months;
- within the neighborhood geographic boundaries;
- that have similar features;
- are approximately the same square footage;
- and are of similar construction
Let’s look at these in more detail.
It’s preferred to have comparables that have sold within 3 months of the analysis date. However, it’s more common to find comps within 6 months or even 12 months if there are few comparables to choose from. So, the general rule is, newest in same neighborhood is best. If needed, 6-12 month old properties within the same neighborhood are preferred over 3-6 month old properties outside the neighborhood boundaries.
You may have heard to look within a certain radius of the subject property for comps. Locking comparable searches into half a mile or a mile boundaries is not necessary. It’s generally best to start with comps as close to the subject property as possible and then branch outward. For the most accurate comparison you will want to pinpoint as exactly as you can the actual neighborhood boundaries. This is especially important since neighborhoods can vary wildly from street to street, particularly in highly populated areas. The following are good guidelines to keep in mind during your initial search:
Neighborhood boundaries typically follow some type of physical feature such as railroads, parks, waterways, highways, and major thoroughfares. Of course, as a remote investor you may not have the chance to scope out the neighborhood in person. In those cases, our recommendation is to use all the technical tools at your disposal. A quick query of the property address in Google Maps will show you some of these features. Then, cross-reference that view with a similar search on any of the property aggregator websites such as Zillow or Redfin. This will allow you to see if neighborhoods nearby have the same characteristics or if they differ drastically.
Apart from the number of bedrooms and bathrooms, there are some other, just as important, features. A great view, a covered garage or carport, or a finished basement/bonus room are a few among many. Along those lines, be realistic about negative features such as construction nearby, or corner lots and busy intersections if the property is to be a family home. In many cases, some features may be positive or negative depending on the part of the country and the climate. For example, a pool in warmer areas is relatively common and will likely be a positive, but the same pool in a colder region might be a negative. The same goes for a fireplace in Death Valley versus Chicago, or a large backyard in rural areas of Tennessee versus one in a densely packed neighborhood in Los Angeles.
It might not always be possible to find comparables with around the same square footage as the subject property. Despite that, it’s important to have a general grasp of the square footage of neighboring houses. Take a look at all neighboring properties in an aggregator to get some idea of what is typical in the neighborhood. It will soon become clear if you’re buying the largest house on the block or one considerably smaller. We often just note the square footage and leave this criteria for the next step in the comps analysis process. This process revolves around narrowing down the comps to the three most similar. The last step, if there are still any large differences, is to adjust the values.
The last criteria in our list of five, is to find comparables that are similar in construction and quality as the subject property. Compare ranch to ranch, split-level to split-level and so forth. This has the least impact of the discussed criteria and will not severely affect the final value. As with most aspects of real estate, everything is relative, but if your potential property is a Victorian located in a neighborhood of row houses, jot that down. It may be a positive or negative factor that you can determine during the next phase.
A Final Word
You will rarely find 2 houses that are exactly alike. Even in planned communities, the comps that are available may not always match your subject property completely. They may have one or two fewer bedrooms, a different number and layout of bathrooms, non-working fireplaces, non-finished basements, a carport instead of a garage, and so on. The more similar the comps are, the better, but it’s not the end of the world if they don’t match completely. Just find as many candidates as you can in this initial phase and you will have the opportunity to narrow down the selection and adjust the values later.
If you’re ready to start finding comps, we outline four different methods to find them in this post, two of which are free or very low cost.
What other criteria do you consider vital to identifying a good comp? Looking forward to your thoughts in the comments below.
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