Step-by-Step Reading Comps and Determing Value

February 2nd, 2009 . by Rob Swanson

Real Estate Investing – Know How to Read the Comps

(Comparative Market Analysis/CMA)

Step by Step Reading Comps and Determing Value

In real estate investing, knowing how to read the comparables, (the COMPS) is a vital skill that you must master early on in your real estate investing career. One of the most devastating mistakes newer real estate investors make (without even knowing it) is listening to and believing the value placed on a property by someone else without knowing how to evaluate whether the numbers really make sense for themselves.

The Comparative Market Analysis or CMA is the vital tool that you will use in making your evaluation. However, even the most experienced real estate investors struggle from time to time to make sense of all the information available.

Each segment of the comparable gives you different information when using it for real estate investing.

There are three types of comparables that you want to look at:

Solds

Actives

Under Contracts

The recently SOLD properties help you establish pricing.

By looking at solds that are within the last 90 days, you get a rearview mirror look at a particular market, neighborhood or type of house.

There are three distinct pricing models within the solds category.

Investor Retail

Homeowner Retail

Investor Wholesale Pricing

The most expensive, highest priced real estate in a neighborhood is the investor’s retail level. These are the houses that have been fixed up from head to toe, from roof to foundation. Everything has been gone through. Everything has been fixed up. Everything is clean, crisp, nice, new, in-style. And it is usually the highest price.

Below the investor retail pricing is the homeowner retail pricing. In this pricing model a homeowner wants to sell their house, and has fixed it up just enough to sell. There is still a lived-in look and feel.

Down at the bottom of the pricing models we have the third pricing segment, the investor wholesale pricing. This is a long way from homeowner retail down to the investor wholesale. These are the distressed houses, foreclosures, abandoned or boarded up houses.

Imagine how large the pricing spread will be. Since the solds are what determines your pricing, the question is how to select the pricing. Oftentimes, it is going to be in the homeowner retail or some range of the wholesale pricing.

The key word is range. When you are pricing a house to either buy or resell it, there is not necessarily a “drop dead number” number. There is usually a range that number can fall within, and it is subjective based upon what your buyer will pay. Some buyers like some things more than others. So there is a range of subjectivity that goes into your comparables.

The second are the ACTIVES properties. The actives show your market competition. If there are a lot of active properties on the market, you know that you have a lot of competition when you go to try to flip your house in that particular area.

So what does this mean?

It means your house will not be the only house on the block that is available for sale.

Additionally, if you’re looking to buy and hold, or if plan A is to retail it to a new homeowner, but if it doesn’t sell your plan B is to rent it, you should look at the rental activity in an area. In this case, don’t only look at the ‘for sale’ activity, but also the rental activity. You can see what the range is for rent and how much competition there is.

The third segment in your comparable property research is the UNDER CONTRACTS (or Pendings).

Now, the under contracts give you a current view of the supply and demand. If it’s under contract right now, that means there was demand for that house at that particular time.

Then start asking yourself questions about the area.

How many houses are under contract?

How many houses are currently active and available?

How much competition do I have?

How many houses have recently sold?

What pricing segment do those solds fall in?

Remember, solds establish your price, actives show you how much competition you are going to have and the under contracts give you a picture of the demand in this area.

For example, if everything falls in the wholesale pricing segment, let’s say there were five houses that sold pretty cheap in the last ninety days, fifteen active properties and two under contract. What does that tell you?

It tells you that you better think twice about a retail flip strategy. Trying to buy, renovate, and flip that particular house is going to be a challenge. The solds were low.

Knowing how to read the comps for your business makes it easier to choose and evaluate which deal is really a good deal, and to figure out how to price and move your deal on the back side.

The more comfortable you are with reading comps and neighborhood selection, the more successful you are going to be as a real estate investor.