By just having a 'pulse' on the market will be able to quickly and intuitively predict the approximate resale value of property that can be used in your initial analysis. Once you get further into due diligence, you will want to 'run comps' of the subject property to ensure that your initial resale assumptions are supported by recent comparable sales in the area.
Step 1: Run Comps
Utilize the Comps Tool to find comparable sales in the area or have your agent look for them. Using these comps, create a Comparable Market Analysis for the subject property. A Comparative Market Analysis will show active listings currently for sale, pending home sales, & recently sold listings for the last 6 months.
Identify 3 To 5 Of The Best Comps Once you receive your CMA, you and your Agent should try to identify the 3 to 5 of the best, most comparable properties.
Similar square footage - Appraisers compare homes based upon the square footage of the property. Therefore, you need to find comps that have similar square footage, ideally within +/- 10%.
Similar amenities, upgrades & condition - Appraisers adjust property values based upon property amenities and upgrades. If other homes have 3 bathrooms and your property only has 2, the appraiser will deduct value from your property appraisal.
Similar age of construction - Mixed-age subdivisions are common, but the prices of the properties will vary depending on the year it was built. A brand new home will be more expensive than a home built in the 1980s. Ideally, when identifying comps the age of the home should be within a few years.
Location - Everyone knows real estate is valued on location, location, location, but do you know what that means? Compare your home to similar locations. If your home sits next to a busy, noisy highway, look for other homes that are located with highway exposure.
Sales Date - Real estate market values can change quickly, so it's important to use recent comparable sales dates of less than 6 months.
Make Price Adjustments
Once you identify 3 to 5 of the best comps for your Subject property, you need to make price adjustments to make an 'apples-to-apples' comparison. This adjustment process is the 'Sales Comparison Approach' which professional appraisers use to make price adjustments for differences in the subject property and comps.
Compare Subject Property Amenities to Comps - Number of bedrooms - Bathrooms - Square footage - Garages - Upgrades
Make Adjustments to Comps for Differences in Amenities - Once you have identified the differences, you need to make price adjustments to the comparables to equalize the values.
Calculate Comparables $/SF - Once the Comparables are 'equalized', calculate the $/SF value for the property. This $/SF value can then be multiplied by the Subject Property's square footage to calculate the After Repair Value of the property.
Comparables Example
In the example below, we have identified 3 recent comparable sales to analyze against our Subject Property.
Comp 1 is a little bit smaller than the Subject Property so we need to equalize Comp 1 to have the same square footage as the Subject. To do so, we multiplied 25sf x ~$120/sf = $3,000
Comp 2 has an additional bedroom and an additional half bathroom, and 25 extra square feet. In order to equalize Comp 2, we need to deduct the value of the amenities.
Comp 3 is basically the same floor plan as the Subject property, but the level of finish is not as nice as the rehabbed properties on the market, so it needs a positive adjustment to account for the added value for the rehab.
Once we have equalized the property values, we divide the values by the Subject Square footage to calculate a $/sf amount.
In this scenario, the Comps are selling for $118 to $119/sf.
To calculate our ARV, we multiply the $/sf amount by the Subject Square footage.
Subject Property Value = Comps $/sf * Square Footage
Subject Property Value = $118 * 1,700 sf
Subject Property Value (ARV) = $200,600
|
| Comp 1 | Comp 2 | Comp 3 |
Sales Price | TBD | $200,000 | $210,000 | $190,000 |
# of Beds | 3 | 3 | 4 (-$5k) | 3 |
# of Baths | 2 | 2 | 2.5 (-$1k) | 2 |
Square Footage | 1,700 | 1,675 (+$3k) | 1,725 (-$3k) | 1,700 |
Condition | Rehabbed | Rehabbed | Rehabbed | Some Updates (+$10k) |
Totals |
| $203,000 | $201,000 | $200,000 |
$/sf |
| $119/sf | $118/sf | $118/sf |