In this Lesson we will learn how to analyze Comparable Sales just like an appraiser so you can accurately forecast the After Repair Value for a property.
What is the After Repair Value?
The After Repair Value is the amount you can re-sell the property for after you make the necessary improvements and repairs.
Okay, but how is the after repair value calculated?
To estimate the After Repair Value of a property you want to step into the shoes of an Appraiser. Home Appraisers use an appraisal method called the Sales Comparison Approach which compares recent comparable sales of similar properties in the area.
To estimate the value of a property the Appraiser will 'pull comps' of 3 to 5 comparable properties that have sold within the last 1 to 6 months (more recent the better). Recent comparable sales should be in close proximity to your property, have similar square footage, # of beds/baths, similar level of finishes and amenities.
The Appraiser then compares the 'Subject Property's' features and amenities with the comparables and makes pricing adjustments up and down to create an equilibrium and make the properties apples-to-apples. The Appraiser then uses price adjustments to adjust the Sales Prices of the comparables to estimate an approximate value of the 'Subject Property'.
Getting a Pulse on Your Market
Before we get ahead of ourselves and worry too much about the complexities of performing a Comparable Market Analysis, let's start with the Basics.
In order to quickly analyze deals and predict the After Repair Value of a property you need to have a 'pulse' on your market and understand the value of properties in your area.a
#1 Establish a 'Farm Area'
In our previous Article, we discussed targeting a 'farm area' that you will use to 'farm, cultivate, and grow' your flipping business. This 'farm area' is a targeted region in your area, such as specific school districts & neighborhoods where you will be focusing on finding deals & rehabbing houses.
By focusing on these targeted 'farm areas', you can quickly become an expert on buying prices, comparable sales & market competition in your area, and ultimately help you get a pulse on the market.
Once your business starts to grow you can start to grow your farm area & expand your market reach.Targeting a 'Farm Area to Flip Houses'
#2 Daily MLS Notifications
The best way to get a pulse on your market is to get daily email notifications of new MLS listings in your 'farm area'. Find a local Real Estate brokerage, setup an account & setup your property criteria to get daily notifications of new listings. Every morning you will get a new batch of listings which to help you get a pulse on the competition & sales values on the market.
#3 Comparable Sales
Although Daily MLS Notifications will tell you what sellers are asking, it doesn't tell you the actual sales price the property sold. In order to really see what properties are selling for, you need to get access to the MLS.
- Realtor - Your real estate agent should be able to get you access to the MLS. Have your Agent pull Comparable Sales information dating back 4 to 6 months so you can get a full understanding of comparable sales prices & the average days-on-market.
- Zillow/Redfin - If you can't get direct access to the MLS, Zillow & Redfin can be decent resources for finding recently sold information, but unfortunately their data feed can be delayed.
- FlipperForce - A new tool that we are building is a comping tool that will allow you to review recent comparable sales information such as Sales Price, $/sf, and Days-On-Market....stay tuned!
#4 Spy on the Competition
To really understand your comps and competition, you should physically walk through the properties for sale in your neighborhood to get a pulse on the competition's pricing and finished product. This will help you understand exactly what kind of flipping competition you are up against in your market.
How to Compare & Analyze Comparable Sales
By just having a 'pulse' on the market will be able to quickly and intuitively predict the approximate resale value of property that can be used in your initial analysis.
Once you get further into due diligence, you will want to 'run comps' of the subject property to ensure that your initial resale assumptions are supported by recent comparable sales in the area.
Step #1 Run Comps
Have your Agent 'run comps' (or get on Redfin) and create a Comparable Market Analysis for the subject property. A Comparative Market Analysis will show active listings currently for sale, pending home sales, & recently sold listings for the last 6 months.
Identify 3 to 5 of the Best Comps
Once you receive your CMA, you and your Agent should try to identify the 3 to 5 of the best, most comparable properties.
- Similar square footage - Appraisers compare homes based upon the square footage of the property. Therefore, you need to find comps that have similar square footage, ideally within +/- 10%.
- Similar amenities, upgrades & condition - Appraisers adjust property values based upon property amenities and upgrades. If other homes have 3 bathrooms and your property only has 2, the appraiser will deduct value from your property appraisal.
- Similar age of construction - Mixed-age subdivisions are common, but the prices of the properties will vary depending on the year it was built. A brand new home will be more expensive than a home built in the 1980s. Ideally, when identifying comps the age of the home should be within a few years.
- Location - Everyone knows real estate is valued on location, location, location, but do you know what that means? Compare your home to similar locations. If your home sits next to a busy, noisy highway, look for other homes that are located with highway exposure.
- Sales Date - Real estate market values can change quickly, so it's important to use recent comparable sales dates of less than 6 months.
Identify 3 to 5 of the Best Comps
Once you identify 3 to 5 of the best comps for your Subject property, you need to make price adjustments to make an 'apples-to-apples' comparison. This adjustment process is the 'Sales Comparison Approach' which professional appraisers use to make price adjustments for differences in the subject property and comps.
- Compare Subject Property Amenities to Comps
- Number of bedrooms
- Square footage
- Make Adjustments to Comps for Differences in Ameneties - Once you have identified the differences, you need to make price adjustments to the comparables to equalize the values.
- Calculate Comparables $/SF - Once the Comparables are 'equalized', calculate the $/SF value for the property. This $/SF value can then be multiplied by the Subject Property's square footage to calculate the After Repair Value of the property.
So in other words, find at least 3 properties that are similar to your rehab project and compare their sales prices, features and amenities and make $ adjustments accordingly. If you need help with this process, a real estate agent should be able to provide a Comparable Market Analysis for your property.
NEXT: Estimating rehab costs
In the example below, we have identified 3 recent comparable sales to analyze against our Subject Property.
Comp 1 is a little bit smaller than the Subject Property so we need to equalize Comp 1 to have the same square footage as the Subject. To do so, we multipled 25sf x ~$120/sf = $3,000
Comp 2 has an additional bedroom and an additional half bathroom, and 25 extra square feet. In order to equalize Comp 2, we need to deduct the value of the amenities.
Comp 3 is basically the same floor plan as the Subject property, but the level of finish is not as nice as the rehabbed properties on the market, so it needs a positive adjustment to account for the added value for the rehab.
Once we have equalized the property values, we divide the values by the Subject Square footage to calculate a $/sf amount.
In this scenario, the Comps are selling for $118 to $119/sf.
To calculate our ARV, we multiply the $/sf amount by the Subject Square footage.
Subject Property Value = Comps $/sf * Square Footage
Subject Property Value = $118 * 1,700 sf
Subject Property Value (ARV) = $200,600