The Science of Comping: How Successful Investors Value Properties | Wholesaling Real Estate
Comping properties is one of the biggest struggles that new and even seasoned investors share when getting started or going into a new market. Here's why...comping is an "art form". It is something that must be continually practiced over and over again until you become an expert. If you follow the training in this blog post you will be well on your way to becoming a comping pro!
The Science of Comping. But First a Quote By Bruce Lee (The O.G. Of Comping (sort-of)...
I am convinced that if Bruce Lee would have ever gotten into Real Estate he would have totally crushed it. The reason I say this is because Bruce Lee was committed to mastering the basics. All true champions past and present believe this, which is the reason they become champions. I love this quote that says "I fear not the man who practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times." I am convinced that if more people adopted this mindset when getting into real estate (or trying to be good at anything really) they would experience success much faster and become more fulfilled along the journey.
Here's the truth: Being good at comping requires understanding and mastering the basics...
Be like Bruce. Bruce Lee didn't practice something once...he practiced it 10,000+ times and because he understood how powerful mastering the basics was, he became one of the greatest champions the world has ever known. Now, I am not saying by mastering the basics you'll become a world-class Kung Fu champion like my man Bruce here, but I am saying if you commit to learning this you will never struggle with valuing properties ever again.
Comping Properties 101: Comparing Similar Properties
The first step to valuing real estate is seeing how your subject property, the property you are comparing, stacks up against other similar properties, the sold comparable properties. When comparing similar properties the first step is making sure you are only looking at property types that match the property you are trying to comp; for example, you would not compare single-family residential houses to multi-family houses. You also want to find 3 properties in fully updated condition, which we will later use to find our subject properties After Repaired Value or ARV.
Here is a list of features you will want to pay attention to:
- # of Bedrooms
- # of Bathrooms
- Sq Foot (Heated)
- Garage / Carport (# of parking spaces)
- Amenities (Swimming Pools)
Now, before you start saying "Whoa Chris, how would I know the value of any of these features...I am no real estate expert!" This is fairly easy to do just by looking at the selling price of a 3-bed room 2 bath property vs a 4 bedroom 2 bath property with identical features. For example, if the 3 bedroom property sold for $105,000 and a 4 bedroom sells for $110,000 it's safe to say the extra bedroom will add an additional $5,000 in value. This is not always the case, but a good rule of thumb. You would apply the same idea to bathrooms, garages, etc.
Here are some averages I have seen for these numbers:
Garages: $5,000 per car space
Car Ports: $2,500 per car space
Swimming Pools: $20,000+
All of these numbers would be added or subtracted from your final value. The goal is to turn the comparable properties into the subject property, so if the property you are valuing does not have a pool and your comp does, you would subtract the value of that item from your comp.
Here's a quick example: your subject property does not have a pool, but a comparable property with a pool sold for $180K. In this case, you would subtract the value of the pool, adjusting the value down to $160K, this is assuming of course pools add $20K of value in the area you are valuing.
On the other hand, if your subject property did have a pool and the comparable does not have a pool you would ADD $20K to the value of that comparable property, bringing the value up to $200K. If this is not making sense right away don't worry about it. I'll explain this in greater detail later in the post.
However, you'll find that after reading this post in full and after a bit of practice you'll become a comping expert in no time. Eventually, you will see that being good at comping properties simply comes down to being able to add or subtract, which of course anyone can do.
Comparing Similar Property Sizes
The next thing you want to do is compare similar properties in size. You can't compare a property that is 5,000 sq ft to a property that is 2,000 sq ft as they are 2 totally different classes of properties. Instead, you'll want to keep your comparable properties in the range of no more than about 20% + or - the size of your subject property. So if your subject property is 1500 sq ft you would compare properties in the range of 1,200 to 1,800. Make sense? Good, let's move on...
When you come across a property that is smaller or larger than your subject property within the 20% range, for example comparing a 1200 sq ft property to your 1500 sq ft property you might find yourself asking "how do I add or subtract for value based upon that sq footage?"
Trust me it's super easy...
For this example, our subject property is 1500 sq ft and the comp is 1700. That's a difference of 200 Sq Ft.
Next, you want to take the property's sold price and divide it by the same property's sq footage. So if a property sold for $250,000 and was 1700 sq ft., that's a sold price per sq ft (SpSqft.) $147 per sq ft.
Lastly, you want to multiply $147 X 200 = $29,400. This is the amount we will now subtract from the comparable property's value.
When a comparable property is larger than our subject property this is how we make adjustments. If any of this seems confusing or you are not sure how to put it all together...hang in there! I'll break it down further towards the end of this post.
Location, Location, Location
When comping properties you want to find similar properties that recently sold (within the past year) that are as close as possible to your property. Ideally, in the same neighborhood even...those are your golden gooses...or geese...anyways...
In densely populated areas you'll want to go no further than a half mile from your subject property...that might even be too far in some cases. As I mentioned earlier, the closer you can get the better.
In rural, less densely populated areas you can go out further, but try to stick to 1 mile at most.
You will want to find 3 properties that are similar in sq footage that are close to your subject property. These can easily be found on free sites like Zillow.com, Realtor.com, Redfin.com, etc.
Ok, now let's review a real-life example of how all of this comes together.
Comping 101: Bringing It All Together
Check out the example below. We have our property, which is the one we are wanting to comp, and 3 separate comparable properties.
Sq Ft: 1,500
Garage: 2 space
Comparable Property #1:
Sold Price: $225,000
Sold Price Per Sq Ft.: $150
Sq Ft: 1,500
Garage: 2 space
- Bedrooms: 1 (-$10,000)
- Swimming Pool: 1 (+$20,000)
- No need to adjust anything else because all other details are the same.
Adjusted Value: $225,000 - $10,000 +$20,000 = $235,000
Comparable Property #2:
Sold Price: $250,000
Sold Price Per Sq Ft.: $147
Sq Ft: 1,700
Garage: 2 space
- Bedrooms: 1 (-$10,000)
- Sq Ft: 200 (-$29,400)
Adjusted Value: $250,000 - $10,000 - $29,400 = $210,600
Comparable Property #3:
Sold Price: $300,000
Sold Price Per Sq Ft.: $167
Sq Ft: 1,800
Garage: 3 space
- Bedrooms: 1 (-$10,000)
- Bathrooms: 1 (-$2,500)
- Sq Ft: 300 (-$50,100)
- Garage: 1 space ($5,000)
Adjusted Value: $300,000 - $10,000 - $2500 - $50,100 = $232,400
Next, add all 3 Adjusted Values together and divide by 3. Once you do this, you will find that our subject properties after a repaired value or ARV would be $226,000...
...And that is how you do it!
In Summary, How To Channel Your Inner "Comping Master"
Do not be intimidated when comping properties. Bruce Lee once said, "As you think, so shall you become." So now I want you to think of yourself as a comping warrior!
As I mentioned earlier, comping is an art form like anything else. If you struggled through this the first time or several times through, you are not alone. I didn't just magically understand how to do this overnight...it took years and running comps on hundreds of properties before I actually "got it." But you know what, though? The more you practice running comps, the better and faster you will get, and the sooner you will become a comping master!
Remember the master Bruce Lee...one kick practiced 10,000 times!
To Your Success,
- Chris Logan
P.S. By the way, since you now know how to value real estate the next thing you will need is properties to comp! I'd like to invite you to a FREE online web class that I am hosting this week called Instant Deal Secrets, where I'll show you how to find the BEST deals in your local area guaranteed so you can turn this knowledge into action and action into income! Register here => FREE Webclass
P.S.S As a side note if you decide to move forward with the offer during the free web class you'll even get my no b.s. calculator that will run comps on autopilot. Just simply enter 3 properties and get the value! Seriously...register for the web class it will blow your mind: https://go.flipteam.io/blogids
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