We are looking at a lot of real estate in San Diego to flip lately, and I’ve always thought it would be nice to do a post about how we run our comps. Surprisingly, this week I read on a message board that an investor was working with a Realtor and she only showed him 2 Active listings as “comps” in order for him to make a huge investment decision.
Finding a deal is the single most important factor in flipping houses, so in essence this is the most important topic. Any other mistake can be fixed but if you don’t buy right you’ll never win. I’m going to cover what sales comps are, where can you find them and how you use them to make smart investing decisions when looking at real estate to purchase for flipping.
What Are Comps?
The term “Sales Comps” is short for sales comparables. They are recent, closed sales in your sub-market area that are most reflective of what your property might sell for on the open retail market. We use the sales comps as an indicator that if we offer a similar or better product to market we can hope to get the same sales price for it.
Sales comps are inherently Sold transactions, but sometimes we also consider what houses are Active, or For Sale, only just to know what our competition will be when our project is done. Homes currently for sale, or active listings, are what I call “pie in the sky,” there are many unrealistic sellers and overpriced homes so you can never rely on what they’ve arbitrarily set their list prices at as what the real market value is. Remember that the open market sets the price for real estate, not the seller.
Ideally, I want to find recent sales, of similar homes, within a close proximity to my investment, to use as sales comps. 6 months to 1 year back in most markets is ideal for a time frame to use. If you are in a volatile market with home prices decreasing, you might want to only look 3 months back. In 2009 when the Government offered the tax credit for first time home buyers it artificially drove up prices, the following year we were careful not to use those “tax credit sales” as comps as they didn’t truly reflect normal market prices. I try and compare my house to a model match, it’s literally an identical home built by the same builder in a development.
Most times this isn’t possible so using the square footage of the home and number of bedrooms and bathrooms is used. Make sure you also are aware of differences in the garage, architectural style, lot size, mechanicals ie: central air, year built, school district and most of all condition. “Soft comps” or “Comp Busters” are sales in your area that push the average price down. These are generally distressed sales such as short sales or bank owned foreclosures.
Where Do I Find Them?
Finding recent sales comps is really easy whether you have access to the Multiple Listing Service (MLS) or not. In San Diego licensed Realtors use MLS which contains a lot of advanced tools to drill down into the info. Its easy to pull a map up of the area around the subject property and analyze whats been going on. There is a radius tool that can be used to look at everything within 1 mile. Here is how it would look using the radius tool within a 1 mile search on everything that’s Active now, and sold within the last 6 months in San Diego MLS.
You can also use a rubber band tool, or polygon search. This enables you to just pull small areas in odd shapes, in a neighborhood and stay between established boundaries such as busy streets and really dial it in. What you are trying to do here is compare apples to apples.
We also don’t want to consider distressed sales as valid open market high retail comparables. A distressed sale is a Short Sale or REO (stands for real estate owned, or bank owned property). Distressed sales are usually in poor condition and were generally sold at a discount due to this fact. REO’s are usually always beat up and short sales sell at a discount because buyers generally don’t want to wait through the long process of getting them closed. In either case, I don’t want to use those numbers so as I go through the comps I remove them.
If you are not a Realtor and don’t have access to Multiple Listing Service, its still possible here in California to find accurate sales data. There are multiple sites out there including Zillow.com, Trulia.com but I frequently refer to Redfin.com. I like the layout and its very easy to use. There is a lag however with current data being updated but you’ll get a good snapshot looking back 6 months to a year for comps. To use Redfin, do a search by zip code, then select property type, sale records (meaning sold listings) and even check the exclude short sale tab. You’ll then see all the sold homes on your search area and even with great photos. It’s important to take a close look at these homes to figure out how you compare to what they offered. Here is what a Redfin search looks like:
How Do I Use Them?
Knowing your comps is primary to making a decision to invest in real estate or flip a house. Knowing how to use the info will be critical to take at least some of the risk out of the game for you. Of course there will always be unforeseen obstacles but at least you’ll be well informed of the local sub market and know your exit price correctly. A huge mistake that I’ve seen made by investors is not really knowing the area and not realizing when there’s a Hidden Boundary. These are dividing lines that you cant see from your office or on a computer or map. It might be a school district zone change or a busy street that cuts through a neighborhood within the same zip code. You really have to drive the area, personally go see your comps and get the feel for yourself.
After pulling your comps I study the pictures to see what level of upgrades they offered. Did the homes have redone kitchens, baths, granite, stainless appliance, etc. I’ll even look real close to see if they updated bathroom tile and changed out cabinets. Are the comparables on hard corners, busy streets or culdesacs? This makes a huge difference, homes in the middle of the block or on a culdesac always sell faster and for a premium.
I try and figure out exactly how I’ll compare once my house hits the market to how theirs looked when it sold, without actually going inside. The reason I drive by too, is to see what condition the homes next door and across the street are in, as this also makes a huge difference on what price you’ll be able to get. Are there any other negatives that could effect the property location value? Running your comps is the first thing you need to do before jumping in your car when someone tells you they have a deal for you.
You can also use Google Street View to virtually drive down the street from your desk and look around but keep in mind the images are not real time. I always print out my comps before going to see a property, that way I can take a look at them during the same visit and not waste another trip. As I drive up to the comps I say to myself “can I make my home look as good or better than that, with my budget?” Good luck!