TGIF – Real Estate Investing Comps

by admin on Monday, February 13th, 2012 | No Comments

“Nick, where do I get comps?” is a question I get asked commonly… so after sending an email to my daughter who’s looking at houses explaining it in laymans terms, I thought “how to get comps” would be a perfect topic for this TGIF! Watch the video above for some “how to’s… like where to find comps, how to calculate values, the square foot method, and more.

FYI, we get our comps from http://www.investorcompsonline.comsign up and send me the receipt and I’ll get your 2nd month free. (I know the owner)

Here’s a copy of what I sent my daughter… enjoy it, and the video above!

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Buying a house is *A* exciting, *b* fun, *c* scary (to a degree), and *d* can be outright frustrating… but as long as you don’t rush into anything moving into your 1st home can be a wonderful experience.

My biggest advice would be don’t get emotionally attached to any one house until you’ve done plenty of looking, and the paperwork is signed and closed. A good inspection may find something unexpected and kill the deal, (or a goofy seller) so you don’t want it to ruin your world if it falls through. (and don’t show enthusiasm for any one house to a Realtor… even if it’s “your” Realtor… have a “it’s ok” attitude with them)

If you’re looking at a house older than 25 or so years and are serious, I’d pay and have a pro house inspector come look at it. (especially if it’s 50+ years) A good renovation can make it look beautiful, but there may be things they hid that are bad… I know people who can hide mold and failing plumbing or all kinds of things. There’s literally books about it, lol. (I’m not trying to scare you, but you don’t want home sweet home to turn into the Nightmare on Elm St.)

A $200 inspection can save you years of headaches!

A $10,000 difference in selling price isn’t just a $10,000 difference. By the time you consider the difference in your payments over the years, it can be more than double that amount.

How much they’ve done to a house doesn’t always mean it’s worth that much more. There’s actually renovations that can decrease the value. In most cases, money put into a house does not add directly to the houses value 1/1… if you put $20,000 in upgrades to the house, depending on what they are, you may add from $5,000 to at the MOST, $15,000 in value. Likely around half of what you put in goes to the value is a good rule of thumb, and only if it brings your property UP to the standard for the area, assuming you paid less than the standard.

Finishing a basement or attic and turning it into living space is the most return on your $. If they put in new floors or carpeting, if they old ones were really bad, all they’ve done is brought the house up to standard for the area… so if they overpaid in the 1st place, it may not add ANY value.

In many cases a house just got old, floors were crummy, walls dirty, no upgrades for many years… and there’s NO way they could sell without replacing stuff. That wouldn’t make the house worth any more than other houses locally… it just makes it “sellable”!

What I’m saying is, if there’s an average neighborhood price for a 3 bedroom 2 bath house, and the seller just put $20,000 into the house, it does NOT make it worth $20,000 more than he paid for it. What he paid for it is irrelevant. The average selling price for the same age, condition and area house is what the house is worth. The worst thing people can do is over-upgrade. Some people put gold fixtures and granite counter-tops into a house in an area that doesn’t typically have those things.

In the business we say “you can put lipstick on a pig (or goat in your case?) but it’s still a pig”.

Yes, it makes the house “nicer”, and it will definitely make it easier to sell… but it does NOT always make it “worth” more. They added things they liked, so they feel better about the house and have a higher standard of living, but a 3 bath 2 bedroom house in an area is still only worth what other 3 bedroom 2 bath houses have sold for recently in that area. (give or take a small percentage, and assuming all are in “move-in” condition)

Here’s an example;

So if someone paid $80,000 for a house where similar properties in “move-in condition” are selling for $120,000, and they put $40,000 into renovations, (bringing it up to standard) it’s likely now worth the $120,000… so they get full value of their $40,000 in repairs. But, if they paid $110,000 for that house and put $40,000 into it, if the area houses are selling for $120,000, it does NOT make the house worth $150,000! It’s still worth $120,000… so in this case they either over-upgraded or paid WAY too much. (if that house truly needed $40,000 in work when they bought it)

I hope I’ve explained myself… I just don’t want you to believe someone when they say “well they paid $125,000 and put $40,000 into it so they’re asking $165,000”. If the area houses are all selling for $165,000 then yes… but if they’re not, it’s not!

Also, a trick Rthey use is showing you a comparable analysis and showing you only the highest prices paid in the area recently. You want to compare it to the lowest sold… in the same condition of course.

So when you’re serious about one, I’ll run comps and have you drive around and look at the condition of recent sales in the area and we’ll be able to figure out what to offer.

Yes, it may have been renovated and now have nice new floors… but a HOUSE SHOULD HAVE NICE FLOORS! When they were put in or how much they cost is irrelevant! Smile