An Investor’s Guide to Running the Right Comps

Running comps in real estate looks and sounds simple, but there is a right way to do it.

The goal isn’t to find properties that simply make your numbers look good. The goal is to find sales that are genuinely comparable to the property you’re considering purchasing and using them to support a realistic AIV and ARV.

That’s also the approach an appraiser takes when evaluating comparable sales. Location, size, condition and other features that affect what buyers are willing to pay are important considerations when selecting comps.

If you’re running your own comps, here’s where to start.

Start With the 1.5-Mile Rule

When you’re pulling comps, a good place to start is within about 1.5 miles of the property. But just because a house is close by doesn’t necessarily mean it’s actually a good comp.

This can be an issue in areas Charleston where the city is small and the ‘good’ neighborhoods can be right down the street from the less desirable. You can walk a couple blocks down the street and suddenly be looking at a completely different neighborhood, different type of buyer, and a different price point.

So when you’re looking at comps, don’t just focus on the mileage. Look at the neighborhood, the surrounding properties, and the type of buyer the property is likely to attract. It comes down to whether the two properties are actually competing in the same market.

You Need at Least Three Good Comps

Once you’ve established the area you’re working in, look for at least three comparable properties for each value you’re trying to establish.

If you’re determining an as-is value (AIV), you need at least three comps that support the property’s current condition and value.

If you’re determining an after-repair value (ARV), you need at least three comps that support the property’s expected value after the planned improvements.

Don’t think of three as the magic number that makes a valuation accurate. Think of it as a minimum that gives you enough information to compare multiple sales rather than anchoring your analysis to one property. One sale can be an outlier. Multiple comparable sales give you a much better picture of the market.

Find Properties That Actually Compare

To do this, look beyond the address. Your comps should be similar in the characteristics that matter to buyers and affect price, including:

• Neighborhood and location
• Property type
• Square footage
• Number of bedrooms and bathrooms
• Lot size
• Age and construction
• Condition
• Quality of renovations
• Significant features such as garages, pools or additions

The closer the properties are in these categories, the more useful the comparison becomes.

Separate AIV Comps From ARV Comps

One of the biggest mistakes investors can make is using the same sales to support both the current value and the renovated value.

Your AIV comps should help you understand what the property is worth in its current condition.

Your ARV comps should help you understand what a comparable finished property is selling for.

That distinction matters.

If the property you’re analyzing needs a full renovation, a recently renovated home may be a great ARV comp but it doesn’t tell you what the distressed property is worth today.

On the other hand, another distressed property might help you understand AIV but tell you very little about what buyers will pay for your finished product.

Think about each value separately and build your comps accordingly.

Don’t Cherry-Pick the Highest Sale

This is where comp research can go sideways.

Maybe three comparable renovated properties sold for $450,000, $465,000 and $480,000. It’s tempting to focus on the $480,000 sale and use it as your ARV.

Before you do that, ask why it sold for more.

Did it have more square footage? A larger lot? Better finishes? A better location within the neighborhood? An extra bathroom? A garage? A pool?

Professional appraisal standards emphasize that comparable sales should be analyzed for meaningful differences, rather than relying solely on the sale price.

The highest sale isn’t automatically the most relevant sale.

Look at the Details Behind the Sale

Once you’ve identified potential comps, don’t just record the sale price.

Look at the sale date, property characteristics, condition, listing history and any information available about the transaction.

If you have access to MLS data, use it. Public real estate websites can be useful for research, but the more complete your data, the better your analysis.

Use Price Per Square Foot as a Check

Price per square foot can help you spot-check your analysis.

If a 2,000-square-foot property sold for $500,000, that’s $250 per square foot.

Compare that figure with your other comps.

But don’t turn price per square foot into a formula that determines your value automatically. Two properties with identical square footage can sell for very different prices because of location, condition, layout, lot size and other characteristics.

The Goal Is a Defensible Number

Good comp analysis isn’t about finding a number that makes a deal work. It’s about finding a number you can explain.

Start within 1.5 miles. Look for at least three comparable properties for each value you’re establishing. Pay close attention to the neighborhood. Compare properties based on the characteristics that actually influence value. Separate your AIV comps from your ARV comps. And don’t ignore differences just because a particular sale supports the number you want.

The best comp isn’t necessarily the closest, newest or highest sale.

It’s the one that most closely reflects the property you’re trying to value.

Take the time to run your comps correctly before you move forward. A few extra minutes of research can give you a much clearer picture of the numbers behind the deal and help you make a decision based on the market rather than an assumption.

Running  your own comps can strengthen your position when presenting a deal to a lender. It demonstrates that you have an understanding of the process and initiative. That level of preparation goes a long way in a lenders eyes when it comes to evaluating a deal.

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