Real Estate Investing: Looking at Comparable Sales
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Real Estate Investing: Looking at Comparable Sales

It's important to remember that no matter how recent the comps may be, they are always going to be slightly out of date. The reason is that they reflect where prices were when the comparable properties were sold, not where they are today. It's important to scrutinize the comps and to make adjustments where possible.
                                      condos comparable sales

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Have I forward priced the comps?

It's important to remember that no matter how recent the comps may be, they are always going to be slightly out of date. The reason is that they reflect where prices were when the comparable properties were sold, not where they are today. However, sales prices are seldom released until after the deal has closed. (This is to protect the seller, who might have discounted the sale, from a new buyer who comes in after the sale has fallen through and now wants the discounted sales price.) This typically takes a minimum of 30 days, sometimes longer. Further, you may not find any very recent sales, so you could be relying on property that was sold up to six months (or more) ago. During that time span, the market may have changed significantly. For example, if the market is going up 12 percent a year, in six months it's presumably gone up 6 percent (half a year's worth). Thus, a comp from six months ago should be adjusted upward by 6 percent to reflect today's true price. (If the market is declining, the same principle applies.) This is called forward pricing. It's adjusting comp prices to the current market. It works both when the market's going up and when it's going down. Failure to make this adjustment is what often leads sellers to offer their homes for less (or more) than they're worth. A buyer who has forward priced the comps may see such a seller's error - and obtain a bargain price.

Are the comps truly similar?

You want to compare apples with apples, not with oranges. Even in a tract setting, there may be many different models with different floor plans, square footage, and amenities. Therefore, it's important to scrutinize the comps and to make adjustments where possible. For example, your home has a swimming pool, but comp homes do not. Obviously your home is worth more because of the pool. (Don't make the mistake of adding in the price of putting in a pool - the added value may be only 20 to 25 percent of the cost of putting in a new pool.) You should subtract from the price when the comps have more amenities or are better in some way and add to the price when your home has more amenities and is somehow better. Homes that have been upgraded, even if they are the same model as yours, will command significantly more than a house that has not been upgraded and vice versa. What should become quite obvious is that this is an approximation game, not one with scientifically verifiable information. Nevertheless, as agents will confirm, after a while you get a feeling for the neighborhood and the comps and can come quite close to accurately appraising a house. Many agents who farm areas (farming means getting to know a neighborhood and regularly soliciting listings there) can often pinpoint the right price for a house just by walking through quickly. A savvy investor should develop the same skill.

Can I rely on the comp price?

Are the prices announced in the MLS (Multiple Listing Service) the actual prices received by sellers for the homes? Or have they been changed or manipulated in some way? Generally speaking, reported prices tend to be highly accurate, especially today when financing is critical and the sales amount determines the mortgage size. However, keep in mind that there is often a significant difference between sales price and asking price. In a normal, calm market the sales price is typically between 5 to 10 percent lower than asking price. In a hot market, the sales price might actually be higher than the asking price. And in a cold market, the discount might be far greater. It can be helpful when trying to appraise a property to check out other homes listed nearby. Just keep in mind, however, that their asking prices may be far off what they actually will sell for once a buyer who is ready, willing and be able appears.

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