Forget the Fluff
Do you know what separates real estate investors who actually make a lot of money in real estate from those who never truly get rich with real estate?
Forget all the fluffy talk about mindset and determination. What do the successful real estate investors do?
Successful real estate investors only buy the properties that they are highly confident will be profitable. In other words, they buy the properties that they’ll be able to sell high enough to make money after all that they’ve invested.
So this is the key: Before you buy a property to fix and flip, you need to accurately estimate the price you’ll be able to sell it for after you’ve rehabbed it. And a proven way to estimate the after-repaired value (ARV) of an investment property is by analyzing comparable sales.
The Best Way to Do It
This might seem obvious, but it’s key: To analyze comparable sales means to compare your subject property (the property you want to buy) to comparable properties (that is, properties that are very much like the subject property). Successful real estate investors know how to identify the right properties to analyze as comparable sales.
The idea behind running comps (also known as “pulling comps” or analyzing comparable sales) is that the analysis will tell you what properties just like the one you’ll have after you rehab it are selling for. You want to compare recently sold properties not to the house in the condition you’re buying it but to the house you’ll be selling.
But how do you determine that a property is comparable to your subject property, and how do you make sure you do it right every time? Here we’re going to tell you the top seven features to look at and—more importantly—the process you should use to become an expert comps analyst.
The Important Features to Consider
The top seven features of comparable properties to focus on are the following:
- Distance from the subject property
- Recency of the sale
- The type of sale (for example, conventional or FHA loan, or cash) or special terms of the sale (major concessions made by the seller or buyer to get the deal done)
- School district (very important to a lot of people, and also an indicator of the distance of the comparable property from the subject property as well as their legal jurisdictions)
- Overall condition (how new and clean does it look?)
- Square footage; here you must consider the finished square footage separately from the unfinished square footage (the finished living areas are worth a lot more than the unfinished areas like unfinished attics or basements)
- Street traffic and noise
When determining if a property is similar enough to your subject property, focus primarily on these seven features of the property. They play a big part not only in the official appraisal but are also psychologically important to buyers. Some people simply will never buy a house in the wrong school district or on a busy street, but some might not even consider other less important features.
The Process You Must Use
The process you use to analyze comparable sales is important because it will determine whether you get better at the analysis or not as well as help you compare two similar deals if you’re doing the comps right.
The two main things to remember are to be systematic and to be consistent. And the best tool that’ll help you follow these two rules is a special spreadsheet designed for comps, like the Swift REI comps estimating table (pictured above).
If you’re systematic and use a spreadsheet or special table, you’ll probably not miss anything. You’ll be unlikely to make calculation mistakes, and you’ll be able to compare several different properties fairly.
Second, you must be consistent with the comps analysis you do on every deal you come across. Again, using a table will help you consistently look at the same features in the properties and adjust for their differences appropriately. If you the comps analysis the same way every time, then you’ll be able to compare two different deals and choose the better one more accurately if you have to make that choice.
You’ll also be able to develop your own reliable system over time as you analyze comps more and more throughout your real estate investing career. And here is what will really help you grow your business: You’ll be able to hire a virtual assistant to do the comps work for you!
Luckily for you, in your Swift REI account you can create accounts for all your employees and assistants and assign the comps analysis work to one or more of your people. If you don’t have an account yet, you have to try it out—you get membership for free for the first 30 days.