Real estate investing is a skill-based career. You need to know how to sell, network, and manage your money. But if you don’t know how to figure out how much a property is worth, you won’t be in a position to build a successful business no matter how many skills you’ve cultivated. So in this guide, we want to give you the comping essentials: what real estate comps are, how you can use them, and how they’ll make or break your success as a real estate investor.
What are real estate comps?
When you invest in real estate, you need a way to determine what a property will be worth after you renovate and repair it. Investors find this information by looking at the sale value of comparable property, which are commonly known as comps. Comps are recently sold properties that are similar to the property you want to buy and are located within a two to five mile radius.
A good comp will share a few important features with the property you’re considering buying. For starters, it will have a similar square footage. If you’re investing in a 1,400-square-foot house, you need to find properties that are between 1,300 – 1,500 square feet to compare it to. Otherwise, the sale value of your comps won’t be relevant to the house you’re considering.
Your comparable properties should also have similar lot sizes for the same reason. A house on a two-acre lot will likely be worth more than a house on a one-acre lot in the same market. Additionally, the lots and houses should have similar features and a similar number of bedrooms and bathrooms.
Rooms and features aren’t the only factors to consider. When you’re researching comps, you should also limit your search to a few miles from your deal and consider how close the houses are to any major attractions or traffic arteries that could affect their value. For example, a house in a subdivision may be worth more than an identical house on a busy road. However, the house on the busy road may also be worth more than a house in a less desirable neighborhood three miles away. These variances mean that you need to know your local real estate market well before you start picking comps.
How do you use comps?
The first step to finding out what a property is worth is identifying relevant comps. Once you find several, you can use their recent sale values to determine what your deal is worth and, by extension, whether it’s worth buying. To do this, you’ll divide the sale price of each comp by its square footage, then average all of the results to calculate their average price per square foot.
Once you have this information, you can multiply it by the square footage of your deal to calculate your deal’s after repair value (ARV). This number will tell you what the house will be worth after you renovate or fix it. It will also tell you whether or not the property is worth buying because it will give you a general idea of how much you can spend while leaving room to repair it and sell it for a profit.
Finding real estate comps
As you can tell, comping requires you to know a lot about the properties in your market. You need to know lot sizes, square footage, local market conditions, sale prices, and the condition of the properties you’re evaluating. Without this information, it’s impossible to confidently comp a deal.
The problem is that by definition, comps are properties that have recently sold, meaning they’re no longer on-market and open to visits or inspections. To make matters more complicated, any house within a two to five mile radius could theoretically be a comparable property. And because they’ve recently sold, you can’t always rely on getting information from a real estate agent’s website like you would if you were looking for on-market listings. Unless you plan to drive around looking for potential real estate comps in your area, you need a better solution.
One option is to work with a licensed real estate agent. An agent will know how to perform a comparative market analysis. They’ll also have access to the multiple listing service (MLS) and can help you locate recently sold properties that fit your needs. In most cases, they can also show you photos of the house so you can see what it looks like. Most importantly, this will give you a glimpse into the property’s interior so you can see if the sellers remodeled it or sold it as is.
The problem with this method is that it can be time-consuming and inefficient, especially if you need to find comparables on a regular basis. It’s also important to note that most agents aren’t going to give away their time and MLS access for free. Unless you have a close working relationship with an agent, they’re going to expect something in return. Even if you do plan to cultivate strong relationships, this can take time, and it won’t make going to an agent every time you need to comp an efficient practice.
Unless you plan on taking the time to get a real estate license, the fastest way to find similar homes near your deal is to use a comping tool. When you select a property, a comping tool will give you a list of potential comps, complete with HD property photos. If you pick the right platform, it will also give you home sales data in disclosure states and hyper-accurate estimates in non-disclosure states!
See how investor Nathan Payne comps his real estate deals.
A quality comping tool can even use this data to calculate your deal’s ARV for you, taking the manual math and guesswork out of the process. Just be sure to look into every comp it suggests and consider the factors that make a property a true comparable before you use your platform’s recommended house value to make an offer. Doing so will ensure you’re working with the most accurate value estimates when you approach a seller.
Why do comps matter?
Comps are an important part of buying and selling homes for a number of reasons. The obvious reason is that they help you make money and avoid losses. But comps often play many other roles in a real estate business in addition to informing your purchases.
For starters, comps are a great way to track market conditions and early market shifts. When you use a comping tool to find comparable properties, you won’t just see which properties have sold, you’ll also see how many have sold, where they’re located, and their typical listing prices. If you invest in and research deals regularly, over time you’ll start to notice how the number of home sellers increases and decreases over the course of months or years.
By tracking these changes, you’ll be among the first to know about important market changes. This could mean that you’re the first to notice an economic downturn, but it could also help you identify positive development trends early. By comping regularly, you’ll stay agile and be in a position to take advantage of new opportunities and avoid down markets.
In addition to the opportunities comping creates, it’s also a great way to evaluate rental income potential before you purchase a property. If you’re adding a long-term rental to your portfolio, you can calculate its ARV and then multiply that number by 0.8 – 1.1% to find out how much you can rent the property for. If the resulting range is high enough that you’ll make a profit on the deal, then it may be a good investment. If not, then you can quickly and confidently move on to the next opportunity.
Finally, comping is essential if you want to negotiate effectively with motivated sellers. Motivated sellers have to sell for below-market value, but they’ll still try to sell for as much as possible. If you’re armed with several relevant comps, including pictures, then you’ll have a legitimate way to explain your offer. Comps and ARV also set a hard upper limit on what you can pay for a property, so you won’t be tempted to overpay just to make a deal work.
As you can see, comps are essential in every part of the real estate investing process. From the moment you discover a property to the moment you and the seller sign a contract, understanding what local homes have sold for is central to making money as a real estate investor. If you can master this process, you’ll have the tools you need to build a profitable real estate business.
Key takeaways
In the world of real estate investing, knowing how to find and evaluate comps is critical to your success. It will help you identify important market trends, negotiate with sellers, and buy houses at prices that allow you to make a profit. But most importantly, knowing how to comp will help you identify and capitalize on winning investments.
Without knowing how to comp, you may be able to negotiate with anyone and network with all of the most influential people in your market, but you’re going to struggle to make money. The good news is that learning this skill is relatively easy. You just need access to a reliable comping tool (preferably backed by home sales data), practice, and a strong desire to learn.
There are also a wealth of resources available online to help you learn how to comp. Our BatchTV show Straight Outta Compin’ with Jamil Damji is a great way to see the process in action. Jamil also shares some important advice about learning how to comp in our ebook: Decoding Real Estate Investing.
In the end, there’s no better tutor than experience. Start finding deals, comp, and be prepared to make mistakes. Mastering the process may take you years, but you can become proficient relatively quickly. If you continue studying comps, eventually the factors that influence a deal’s price will become obvious to you and you’ll be well-positioned to succeed as a real estate investor.
