Comparable Sales - How to Determine Property Value

    Before you ever purchase a property, or even seriously think about purchasing a property, you need to know what that real estate is worth.  Value isn't determined by what someone is asking for it, and it isn't a "deal" because the seller will take something less than asking price.

Value is determined by the price a buyer will pay.

     Since any property you'll be looking at won't have sold recently and you won't know what a buyer would pay for that individual property, you can look at recent sales of properties comparable to the one you are interested in, and determine a probable value.  The major factors you'll need to look at will be size of the structure(livable square feet), size of the lot(lot square feet), the number of bedrooms, the number of bathrooms, the year the property was built and any factors that affect the usefulness of the home.

The best comparable is the house next door to your subject property.

     If the world was easy, the house next door to your subject property would be the exact same model with the layout, room count and square footage matching exactly and it sold just last month after being listed with a Realtor for 30 days.  You really wouldn't need to think much about your subject property value or the time needed to market the property, because it's all pretty obvious from the next door comparable sale.  It's fairly safe to say that you could invest for many years, though, and never find a next-door comparable sale.   So, you need to look farther away for your comparable sales, or comps.

Expanding your horizons.

     Keeping in mind that with comps, since closer is almost always better, look for recent sales with the same bedroom and bath count first on the same street as your subject property, then expand to adjoining streets.  You continue to expand your search until you have sufficient comps to begin to get an idea on value.  The comps do not need to be exact matches, but it's very helpful to have several exact, or very close comps, some comps that are slightly larger either in square footage or room count and some comps that are slightly smaller either in square footage or room count.  Properties that have sold within the past three months are the most accurate, three to six months old are useful, six to twelve month old sales can help to indicate general market direction, but have limited usefulness as valid comps.

When are you done?

     You are done with looking for comps when you have 3 to 4 properties having the same room count as your subject property and the square footage of those comps is close to your subject property.   The objective is to compare "apples with apples", so you want to have your comps closely match your subject property.  Re-verify that your comps were sold within the past few months, that lot square footage and the year the property was built is close to your subject property and you are done with the "paper" part of doing comps.

Time to jump in the car.

     Taking your comps, your subject property address, your notepad, pen, cell phone, map and anything else you might want, it's time to see what the comps actually are, in relation to the subject property.  LOOK AT THE COMPARABLE SALES FIRST.  You don't want to be biased, or try to justify a deal.  Look at the comps, get a good idea of condition, appearance and location before you look at your subject property.  While you are looking at the comps, also take note of properties in the neighborhood currently listed for sale that appear equivalent to your comps.  You can call and get listing prices either from your cell phone or when you get home.  When you are done with viewing comps, it's time to see the subject property.  By this point, you should have a good idea of the neighborhood, what the comps looked like and what any listed properties looked like.  How does your subject property compare?  Can your subject property be brought to the same condition as the comps by minor rehabilitation, or does it appear ready to be torn down?  Could it have comparable visual appeal, or is it hopelessly ugly?
Assuming your subject property does have some redeeming features, you'll now need to estimate the probable costs to repair the property and bring it back to the value evidenced by the comparable sales.