One-half of all my real estate students quit or fail because of this one part of the fix & flip process:
I see investors fall in love with a single property, convinced that’s the one to launch their career. They want to move forward so bad that they either skip finding comps or they fudge numbers – thinking that their property is different than the ones around it.
This happens all the time, and failing to properly estimate investment property values is a very expensive mistake.
Here’s how I teach my students to find comps and value their property!
Find 3-4 Comparable Sold Properties
On most sites where you can find properties (Zillow, Trulia, Realtor.com), you can find a list of recently sold properties as well!
My general rule of thumb for comparing properties is to find ones within a 1-mile radius that have similar features. Ideally, you’ll match square footage, beds, and baths, if not other features of the house as well. Once you have 3-4, you’ll want to pick the cheapest one as your comp. That’s the surest path to turning a profit, while assuming best-case scenarios often leads to disappearing margins.
Find 3-4 Comparable Properties Currently on the Market
The reason I teach current market properties in addition to sold properties is that the market changes. Maybe 8 months have passed from your sold property comparison, and the market’s dropped 5% since then. On a $200k house, that’s $10k you’re missing out on. You have to take into account market changes, even if only a few months have passed.
Use the same parameters as above, and see what homes are currently being listed at. Once again, pick the lowest priced one as your benchmark to see if your deal will be profitable.
When to Throw Comps Out the Window
That 1-mile radius measurement is a good rule of thumb, but don’t stick to it in EVERY scenario! It’s pretty common (especially in major cities) to have a nice part of town flanked by more run-down areas – and certainly within a mile. A famous example of this is the White House being a mere block from a low-quality area of town.
Or, here in Salt Lake (where I personally do most of my work ), there’s a well-known “dividing line” where anything on the east side is much more valuable than the west side!
You can see how this would be an issue – without more knowledge of the area, you might grab expensive comps from a nicer neighborhood because it’s within the 1-mile radius. In reality, your home is in the less desirable area and even rehabbed will never approach the value of the homes across the street.
Also pay attention to what’s near the property. For example, maybe you find a property that seems to be underpriced by $30k… and you think you’ve found your next fix & flip! But upon closer inspection, you notice the home is located on a busy street right next to a Burger King – thus explaining the $30k dip in price.
The comps in that area won’t be accurate, because they’re not all next door to a Burger King!
Anyway, stick to the 1-mile radius rule – except when common sense tells you otherwise.
If you’re ready to let us help you step-by-step through your first (or next!) fix & flip, Do Hard Money is here to help. Just go ahead and click the link below and fill out the short questionnaire – we’ll let you know if we’re a good fit to help fund your next deal: