If you are new to the house flipping scene, you may have heard people talking about comparables. If you've been doing it for a while, you should be pretty familiar with the term.
However, you may not fully understand it. Hopefully, I'm about to give you a better understanding of what comparable means.
(Of a person or thing) able to be likened to another, similar
Of equivalent quality; worthy of comparison
Being so similar as to appear the same
So, you get the idea, things that are "so similar as to appear the same." In the house flipping arena, we're talking about other houses in comparison to ours. I could probably teach a whole class on the subject, but for now, I want to touch on some key points.
Being an appraiser, this is something I deal with daily and has helped me tremendously in my house flipping business.
The better you get at recognizing comparable sales, the better the house flipper you will be!
Let's go over some of the main things you want to compare. First off, as the old real estate saying goes, Location, Location, Location. One of the first things an appraiser is going to consider is the proximity to the house he/she is appraising.
A critical component of that location could be school systems. If your home is in a highly regarded school system, then you typically want to consider only nearby sales in that school system.
You could have a sale very close, but a different school system. Unless those two systems are considered equal, then you won't want to use it. A good rule of thumb would be to only consider homes in the same school system.
A similar age is another factor that can be extremely important. If your renovation was built in 1975 and you have homes in the neighborhood that were built in 2005, they typically are not going to be comparable.
Preferably, you are going to want to find a renovated home that was built around that time. One point I should make here is about effective age. The effective age refers to how old the home appears to be. If it is totally renovated, then the actual age (when it was built) may be very different from its effective age.
The size of your home is another crucial factor, along with the design. If your home has a finished basement area, then preferably, you are not considering homes with crawl space or built on a slab.
However, I will say, if I can't find three or four sales with a basement, then I might consider using a house built on crawl space as a third or fourth comparable. Also, if the home you are renovating is 1,500 square feet, you need to find homes that have sold with similar size.
You may have a recent sale on the street that is the same age, but it has 3,000 square feet. You'd love to use it because it would make your home worth so much more. Sorry, your appraiser is most likely not going to use it.
Another thing to consider is the bedroom and bathroom count. I renovated one recently that was a small three-bedroom one bath home. When I was determining the ARV (After Repaired Value), I only considered one-bathroom homes.
The values in this area went up considerably for two bathrooms, but I only had one bathroom. I only searched for one-bathroom homes in determining value. This is very important and what an appraiser is going to do and look for. If someone is buying your property and borrowing money, they are going to have to have an appraisal done, so think like an appraiser!
One last main item to consider that can make all the difference in the world is the condition. If you take a look at the houses I buy, that will show you just how big a factor this can be.
We just purchased a home in a suburb of Birmingham for $250,000. When we complete the renovations, we are going to list it for $450,000. The only difference will be in the condition. We are not adding square footage or adding bathrooms, just renovating everything that is there.
So you see, the exact same house can have tremendous differences in value, only by changing the condition!
There are so many things to consider when looking for comparables. These we discussed are just a few of the main ones you want to be sure and consider. Other areas of comparison might be views, such as water views, mountain views, golf course views.
Is your home on a higher traffic street? Is commercial property nearby? How's the topography, below grade, above grade? You see, there can be countless items to consider.
If you have doubts or questions, go back to the definitions. Remember, "being so similar as to appear the same" is a great one! If you keep that in the back of your mind, it'll always steer you in the right direction.