After hours and days and weeks of searching, you’ve finally found the house of your dreams. The first step to really owning that house? You now have to make an offer. But how do you figure out when an offer is fair, too much, or too little? Here is where “comps” come in.
In real estate, the term “comps” refers to recently sold homes similar to that one you have your eyes on, based on a number of key criteria. In general, comps can help you make a fair offer by giving you a range of the “fair market value” of the homes to that one you want to buy?
So how to start making comps? Follow these steps I’ve written below and watch my video to learn how to comp like a pro now.
1. Start with a subject property
The first and foremost step is to find a property you want to make an offer on. Once you’ve found it, your next step would be to draw a half-mile radius around it and check how much similar houses in that radius previously sold for. Even though this method may not be accurate at times since there’s a chance that you will cross city boundaries or a major road, it’s still a good place to start.
2. Size and Bed/Bath Counts
Look for other properties that match your house’s square footage or its number of bedrooms and bathrooms. Obviously, the numbers won’t work if the number of bedrooms and bathrooms and square footage don’t match since the numbers will be too skewed.
What I always do is compare only houses that have the same number of bed and baths and also put a bracket on the square footage by setting a plus or minus 300 square feet to the size of my subject property. For example, if the ideal house you’re looking for is 1,500 square feet, I recommend looking at what prices other homes which fall within the range of 1,200 to 1,800 square feet sold for.
3. Timeframe – Go back 6 months
When setting a timeframe, my advice is to look at prices of similar homes that sold up to around 6 months ago. You also don’t want to go so far back from 6 months, since normally, appraisers also won’t go so far back as more than 6 months ago.
You have the list, now what? Make some adjustments!
Now that you have your list, it’s time to make adjustments to it, depending if you got too many or too few houses in your search results. Ideally, you want to have only 5-7 properties to have a good data set to make sound price comparisons.
If you get too many houses, you can narrow down your results by doing one of the following or both:
Tighten up your search radius
Instead of a half-mile, you can indicate just a quarter of a mile in your parameters. It’s time to also make sure that you don’t have to cross boundaries of cities or major freeways or roads.
Tighten up your time frame
Instead of looking for properties that were sold 6 months back, you can also try looking only at properties that were sold 3 months back.
In contrast, if you got too few houses, you can also
Change your time frame to include houses sold between 6 to 12 months ago, or
Loosen up parameters on your bed-bath count.
You usually don’t want to get up on this since going down usually gives more results.
Once your list is dialed in, look at the individual houses.
When you already have your 5-7 houses, the next step would be to have a closer look at the individual houses.
For example, look at the photos.
Is the house a fixer? Is it outdated? Would it need a new carpet? New paint? New kitchen? Hopefully, all these would be reflected in the price and you can easily see the difference compared to the ones that were fixed up and beautiful.
Also, determine its location.
Is it located next to a freeway? A school? Or a busy street? Then take note of the difference to houses that are located for example, in a nice neighborhood, where it’s more quiet and peaceful.
To get a better picture of how all these criteria will affect your offer, look at the average price of all your houses in your list.
Let’s say for example, there are 5 houses in your list—two are fixers and three are all fixed-up and beautiful. What you want to do is get the average of all the comps, the average of all the fixers, and the average of all the fixed-up homes. Look at all the three values and it should fall within this order: average of fixers < average of all comps < average of fixed-up homes. This way, when you’re making the offer, you already know (depending on all the criteria you considered) which side of the average of all comps you’re going to skew.
Apply this then to the square footage you have and hopefully, you can already come up with a couple of values that make sense to you.
One final word on adjustments. What is this house worth TO YOU!!
Lastly, all that’s left to do is to make final adjustments depending on what the house is worth to YOU. What it’s going to be like to live there, come home every day, take that commute, enjoy the time in the weekend and more. In addition, if it’s next to a school or a freeway, how much would that noise affect it’s worth to you? Because in the end, it all boils down to this human factor. Only you can decide what this house is worth to you.
I hope this list has helped you. If I can give you more context on the process of buying your first home, please do not hesitate to reach out. My information is below.
Here’s to all your success!