A secret of successful property investors is finding the right purchase price to maximize potential profit. This is a number’s game: a careful balance of market analysis, intuition and cautious planning.

One of the most common and reliable ways to determine an offer price that is low enough to see a large potential profit margin yet is at the same time competitive enough to win you the bid, is through real estate comps. Perfecting the strategy of using real estate comps to reach that ideal market price comes with extensive research and experience.

In this article, we will  guide you through the steps of using real  estate comps to estimate property value, provide you with the resources for finding comps, as well as examples, so that you can confidently arrive at an offer price that maximizes the potential profit of your next project and beyond.

What are real estate comps?

Real estate comps, short for “comparables”, are homes that are located in the same neighborhood and are similar in size, age, condition and features as the  property you are trying to buy or sell. Understanding how to find comps will help you determine an appropriate and competitive asking price for your potential investment property.

Here are the 5 features to look for when you compare the home value of similar properties:

Home Square Footage

It is not necessary to find comps with the same square footage as the property you’re working on. This would be close to impossible and make this research-intensive phase longer and more difficult than necessary. When you compare square footage, properties that are considered acceptable comps should come within 25% of the square footage of your potential purchase. So if your property is 1,500 square feet, look for comps in the 1,125-1,875 square feet range. Anything bigger or smaller will skew your averages.  

Bedrooms and Bathrooms

For real estate investors, the number of bedrooms and bathrooms is of utmost importance, especially when combined with the square footage. For example, there could be a 2,000 square foot house with 3 bedrooms and 2 baths, while there could be another house of similar size but with 5 smaller bedrooms and 4 baths. Those two properties would be valued differently if they were in the same neighborhood.

Thus it is critical to find homes in your area with the same number of bedrooms and bathrooms to help you more accurately determine the offer price. If there aren’t any recently sold homes in your neighborhood with the same number of bedrooms or bathrooms as the property in question, consider the property’s amenities to make up for it.

Amenities

Amenities are any features of the home that add or subtract property value, depending on the type of buyer you plan to sell to. As mentioned, finding properties with similar amenities is especially important if you had challenges identifying homes with the same number of bedrooms and bathrooms. Big backyards, property space to add an expansion, recently updated bathrooms or kitchens, a swimming pool, higher-end finishes and materials and walk-in closets all add to the value of the house.

Also keep in mind that a property’s amenities should line up with the overall feel of the neighborhood. If there are mostly growing families in a neighborhood, then a big backyard or easy access to a community playground might be important.

Neighborhood

As a property investor, you are not just investing in the property but also in the neighborhood. A lot can change from one neighborhood to the next. As a result, a home’s location almost always impacts the home’s value (and your potential ROI). When evaluating the neighborhood, ask yourself the following questions:

  • Who will your neighbors be? Is the area mostly first-time home buyers, retirees, or college students?
  • What is the neighborhood like at night? Is it a place you would feel safe?
  • What is the noise level like during the day, on the weekends and at night?
  • Do the homes around you have scheduled lawn maintenance, and if so, is this something you’ll be willing to do as well?
  • Are most of the residents renters or do they own the home?
  • Are the homes on either side of the subject property well-maintained?

While potential buyers might primarily be looking at your property, they will also want to know who they will live next to. Neighbors can potentially make or break a deal for buyers. They could pass up a house they love for one in a different area if they are uncomfortable about the neighborhood.

Recent Sale Prices

When you find a handful of comps that are similar in square footage, bedrooms, bathrooms, and amenities, it’s time to find out what they were priced at and how long they stayed on the market. This will give you an idea of the price bracket you need to stay within to be competitive with the other homes on the market and maximize your ROI.

When looking at sale prices of homes in your area, you must consider more than just the final sale price. While location, proximity to great schools, and overall condition of the home play a significant role, the other major factors that can significantly impact the sale price include:

  • Supply and demand
  • Interest rates
  • Economic growth
  • Homeowner upgrades (i.e. additional bathrooms, for example)
  • Growth potential (i.e. can you add a second story or a guest house on site?)

How to determine home value using comps

Now that you know the 5 key features to look for in real estate comps, here is how and where you can leverage that information to estimate the property value for your next investment.

Search Recently Sold Listings

Your first step in finding comparable properties is to search recently sold listings in your area. The key word here is recent, which usually refers to homes sold in the last 6 months. As a reminder,  you will want to make sure the comps you’re looking at:

  • are in the same neighborhood
  • have similar features
  • are approximately the same square footage, and
  • are of similar construction

While there are plenty of useful online resources that you can use to approximate home value, do not make your decisions based on these online calculators alone. Instead, confirm your research with a reputable Realtor in the area and even check out the comps yourself.

Your goal is to find three similar properties to help you determine a competitive offer that still has attractive profit potential.

Free home value websites

Below are some of the most popular free home value resources, which can help you estimate a property’s value in minutes.

Zillow

Zillow is the go-to online resource for everything real estate related. This interactive site makes searching for properties a breeze. It offers a variety of filters for a more specific search and bases their home values on a variety of different sources, including public records and recent sales comps.

Trulia

Trulia is another popular real estate listing website with a unique way of connecting users through local insights, discussion boards, community events, crime reports, and school ratings. This comprehensive site aims to give buyers a full picture of the community in which they are buying.

Redfin

Redfin boasts unique features that many other real estate listing sites don’t have. This includes  a 3D walk-through feature to truly experience the home and a relatively low listing fee for sellers, at only 1.5%. However, this is more of a buying/selling website and is not necessarily the best spot for estimating house comps.

Realtor.com

One of the things home buyers, investors, and house flippers love about Realtor.com is that it  not only can calculate a property’s current value, but it also allows you to track your investment as it grows via an innovative tracker.

Paid home value websites

While the above-listed sites are great places to start, some resources that dive deeper or provide more specialized information may require a small fee. Pairing one of these paid sites with a few of the free sites will help you feel even more confident in the price range of your offer.

RealQuest

RealQuest is considered a leader in property-level insights, offering interested buyers inside information that may not be available on many of the other websites. RealQuest maintains the most comprehensive financial and real estate related database in the US and is growing internationally. With portfolio monitoring, rent prediction and predictive modeling, this data-driven site dives deep into the logistics and analysis of everything real estate.

Home Smart Reports

Home Smart Reports is a no-frills website but uses up-to-the-minute statistical and mathematical models to give you a detailed account of the sales activity in any particular neighborhood.

Confirm the accuracy of comps

Get expert advice

After you use the aforementioned home value websites to estimate house comps, be sure to get a second opinion from your Realtor. If you have vetted for the right Realtor properly, he or she should have inside knowledge about the market conditions of specific neighborhoods you’re looking at and will let you know if the price range you are leaning towards is accurate and realistic.

Get an appraisal

Another way to get expert confirmation about a property value is to have it appraised. An appraisal will offer a non-biased estimate of a property’s current worth. If your online research comes close to the results of the appraisal, you can be confident that you’re heading towards that golden price range.

Remember that an appraisal is different than asking your real estate agent for a Comparative Market Analysis. An appraiser will look at the details of the home to calculate the value. Some major areas they evaluate include property location, room count, convenience of the layout, improvements needed for the kitchens and bathrooms, condition of systems such as the HVAC, and the overall condition of the property’s interior and exterior. Taking all of these things into consideration, your appraiser will be able to give you an idea of a fair market value for the property in question.

You can find an appraiser in the following ways:

  1. Contact your state agency that licenses appraisers
  2. Search online to find an appraiser in your area via https://www.asc.gov/national-registry/findanappraiser.aspx
  3. Ask your realtor, bank or mortgage company for a referral

Visit the property yourself

After you have a solid idea of a property’s worth based on the comps in the area and a second opinion from  an expert, get out there and check out the comps yourself. While an online search can give you a broad idea about the overall state of the property and location, physically checking out the comps add that extra layer of safety net.

How to leverage comp value for your house flipping business

Understanding the importance of comps and what they are is one thing, but effectively leveraging them for your house flipping business is another story. Use the following strategy to find the appropriate price range for your future fix and flip project.

Start your search with all recently sold properties within a ½ mile radius of the subject property. Ensure these homes have the same numbers of bedrooms and bathrooms as the property in question, and within the same square footage range, give or take 10%. Try to keep your search within homes sold in the last three months.

If you find something, that’s going to be your best and most accurate comp. If you don’t find anything, expand your search gradually. Start by adjusting your search to + or – one bedroom. If this still doesn’t bring up useful results, extend the sale date, and as a last resort, expand your search radius to the one-mile mark.

Real estate comps example

Rita, a house flipper, found a charming four bedroom single family home in a suburb outside of Nashville. Before she made an offer, she did thorough research of the comps in the area. She used Zillow and Redfin to search for all of the four-bedroom homes within a ½ mile radius that had sold in the last three months. No luck.

So she expanded her search to three bedroom and five bedroom homes in the area and found a few that were compatible. The three bedroom homes were 20% smaller than the house she had her eye on, so she discarded those and focused on the homes that were closer in square footage. As she looked at the list of five bedroom homes sold, she found two that were similar in square footage and were also sold within the last 3-6 months, so she focused on comparing her potential property with those two properties.

Rita then brought her results to her Realtor who agreed that the two homes she found were the most accurate comps and helped her decide on a competitive offer that she calculated also had high profit potential for her house flipping business.

The bottom line

Real estate investors often have to make quick decisions that could significantly impact their return on investment. This includes estimating the value of a potential investment property so that it can be factored into the business plan. The fastest and most effective way to do this is by understanding and leveraging the real estate comps. This takes diligent research and experience, but soon you will be able to seamlessly integrate using comps into your real estate investing routine as you successfully grow your business.

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