There’s some confusion about whether Teddy Roosevelt first said, “Comparison is the thief of joy.” Whether it was our 26th president or not, whoever said it was onto something. In many cases, this statement holds true.
But when it comes to real estate investing, comparison is critical. Understanding how to find and use comparable properties is a skill every investor should have. Let’s look at comps and see why they are important to real estate investors.
What are Comps?
Comparables, or “comps,” are similar properties that you can use as a benchmark against which you can measure another property’s value. Once you have several comps, you can perform a competitive market analysis to determine the fair price for a home you are considering purchasing.
What Makes a Good Comp?
The more similar a property is to the one you are considering, the more relevant it is as a comp. While it is nearly impossible to find truly identical properties, here are some of the factors you should consider when evaluating whether a property has solid information to offer about your property’s price:
- Number of bedrooms and bathrooms
- Lot size
- Type of home (single family, townhouse, condo, etc.)
- Finishes and materials
- Date of sale
Properties in the same neighborhood and development are often best because they will naturally have many of those factors in common. However, if one property is at the end of a quiet cul-de-sac and a nearly identical home faces a busy road, the prices will likely be different. That doesn’t mean the comp doesn’t offer helpful information, however. You can look at the price and know that your house in a superior location should be worth more than that one. It still offers a benchmark.
Why Should You Care About Comps?
You never want to overpay for a property, and comps are one of the best ways to avoid doing that. Without comps, you cannot know what a home is worth, especially if you aren’t familiar with the area. Looking at the comparables helps with all of the following:
Sellers aren’t always entirely rational about the value of their properties. They feel nostalgic about the family room where Junior took his first steps. The dated carpet, which hasn’t been replaced since Junior, now off at college, took those steps, is invisible to them. Showing them comps provides a concrete example of what their home may actually be worth to a buyer.
Suppose a similar home with many upgrades sold recently for less than they are asking for their property. That may help them see that their asking price isn’t in line with the current market, allowing you to negotiate down to a more reasonable price.
Decreasing Your Risk
Guessing what a home is worth is inherently risky. You may end up overpaying if you base your valuation on guesses or on properties with little in common with the one you are buying. That will affect your investment’s profitability and cash flow for as long as you own the house. Taking the time to find solid comps means you will have a great sense of what a home is worth. If the sellers don’t accept that price, you know you need to move on.
While you are likely planning to buy a home and hold it long-term as a rental, you still want to maximize your profit. If you pay more for a home than it is worth, your profit will suffer when it comes to sell.
You already know you don’t want to overpay. But can you underpay? A lower purchase price means a smaller mortgage, and more of your monthly rent collection stays in your pocket instead of going toward the loan. You can use comps to help you find homes priced at less than market value. If you can pay less than the home’s current value, you have instant equity the day you close on your purchase.
While most people think of sales when they talk about comps, looking at comparable properties that have rented recently can help you determine how much rent you can charge for a property.
Where Can You Find Comps?
Internet real estate sites have made finding comps incredibly easy. You can search for recent sales in a potential neighborhood and set filters to show properties with similar square footage and number of rooms. You will want to look at the photos included with the listings to compare the home’s condition and finishes to yours.
Real Estate agents are another excellent source of information. They can do the work of searching through previous sales to find solid comps.
Some investors use public records to track down comps. In many areas, the recorded sale price of a home is part of the public record. This information may be available online, or you may have to visit the local courthouse to find it.
Roosevelt also said, “Do what you can, with what you have, where you are.” As a real estate investor, you can use comps to help you better understand what you can do with the money you have wherever you want to make a purchase. Finding solid comps and seeing how your prospective investment property stacks up can save you tens of thousands of dollars, and that should certainly bring you and your bank account plenty of joy.