We have all heard the saying in real estate that “you make money when you buy.” I can tell you from experience that this is true. This is why it’s important run comps and figure what the after repair value (ARV) on a home will be.
How to Run Comps and Calculate ARV on a Home
When it comes to comparing homes and what they sold for there are a few key things we need to do.
Sales or Listed Price
Some people use a mix of these, but personally I like to use the actual price the home sold for as my comparable.
I like to know exactly what I am getting for a home after it has been repaired and updated. Even if I plan to hold it as a rental – knowing what I can cash out in equity is just as important.
Thus, I only use the actual sales price of homes within the past six months. If you live in a more rural area you may need to use a full year if there hasn’t been much turnover.
For a comp to makes sense it needs to be similar in size to the home you are looking to buy. Take the number of square feet of the home you are looking to potentially purchase and find recently sold homes that are within in 200-300 sq. feet.
If there is not much to work with then you will need to adjust for the difference. Say for instance all the available comps are more than 500 sq. feet bigger than your prospective home.
The best thing to do is take the recent sale prices and divide them by the square footage of the comparable homes to get a price per square foot.
Then deduct from each comparable home the appropriate amount so it is roughly the same size as your prospective home.
Granted more or less bathrooms and bedrooms will impact the square footage, which we just accounted for – however that will not give you the whole picture.
A renovated bathroom has more value than an outdated bathroom. A large master bedroom has more value than one of standard size bedroom room and so on and so on.
This is where it makes sense to dig a little deeper. Many times sold properties still have an inactive listing online with pictures, especially more recent sales.
Take a look through those pictures and see if the home was updated and nice or old and out of date. Then figure it into your comps.
Often this will explain the price differences between similar homes that have sold in the area. Use this information to gauge how nice to make any renovations you plan on doing.
Like I always say – the key to making money with real estate investing is to “Buy Right”
Be sure to use the online property calculator to run the numbers on a home. Get access here: Property Calculator
For a blueprint on how to make money with rental properties read a copy of ScaredyCatGuide to Investing in Rental Properties.