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You’ve done it. You’ve found the investment property of your dreams. It doesn’t need a ton of work, the buyer is eager to sell, and you’re fairly confident that you can flip this property quickly. All in all, you’d be comfortable saying that this investment is a sure thing. Except you’ll sometimes run into this problem: What if there are no comparable properties in the area? Suddenly this “sure thing” of an investment property isn’t so sure anymore.
Is it still a safe investment for you to take, or should you hedge your bets and walk away? What should you do when you can’t find a comparable home in the area?
There’s a Difference Between Investing and Speculating
Before you decide to trust your gut on this property instead of the data, consider whether you’re acting as an investor or a speculator as these roles play real estate investing much differently than the other.
An Investor is someone who considers risk carefully and, with few exceptions (like if it’s an exceptionally hot market akin to late 2020), requires comps to be available before purchasing a property.
A Speculator is someone who takes more risk because they feel something will happen soon and they’re confident enough to put their money where their mouth is. You could also think of speculation as “real estate gambling.”
Obviously, your business should be run in the way that’s most comfortable for you, but I personally am an Investor so I’m constantly relying on what the data shows me. I’ve been doing this long enough to understand that when it comes to real estate, I’m not willing to be the pioneer in an untested market. When I’m interested in a property and am having some trouble finding comps in the market I do a few different things that usually help clear the way towards me figuring out whether to invest or not. Let me give you a few suggestions for what I like to do when comps aren’t coming as easily as I anticipated.
What if There Are no Comparable Properties in the Area?
- Expand your location radius search – I normally like to start off with ~¼ mile radius when looking for comparable homes in the area, but if that’s turning up short then I’ll expand to ½ mile. If that turns up nothing, then I’ll go up to a full mile, but will often take that as a bad sign.
- Expand your timeframe for recently sold – My default timeframe for finding comps is to look at the past 3 months to try and find comparable sold properties. If that turns up short, then I’ll go out to 6 months, 9 months, or even a year if I’m not really coming up with anything. To be completely transparent though, this is normally when I walk away as this length of time really opens up the potential for my lender to have a difference of opinion as to what comparables are available, which can lead to a difference in the capital available that could really ruin my chances at a successful investment.
- Adjust your definition of “comparable” – This one can also open up a headache with your lender, so I wouldn’t get too liberal with this, but if you’re having trouble finding comps in square footage or condition, then consider broadening your search, keeping in mind that there’s going to open up some wiggle room with this that makes it difficult to get a 1:1 comparison. My rule of thumb is to try to find a comp that is no more than 10 – 25% different for square footage, knowing that my actual price per square foot will vary slightly from what I’ve found.
There’s Always a Plan B (or C…or D)
I know that sometimes you’ll just find that one property that you can’t shake, no matter what the fundamentals are saying. Look, I get it. When you’re starting out it’s hard to walk away when you’ve just got a feeling that you’re right (I find that more seasoned investors are better at this than new ones). So rather than talk you out of it, let me offer you a few things to think about when you can’t find a comparable and still want to invest.
- Pay with cash instead of using a lender – This is the safest way to speculate, in my opinion, as you’ll be able to hold and wait much longer for the right time to sell than if you are beholden to a lender. Granted, this is a hard thing for many new investors to do which is why I recommend you play it safe and walk away from a property that has no comps instead of playing the speculation game.
- Use speculative investments as rental properties – If you’ll be holding onto a property for the foreseeable future, then use it to start earning back that investment as quickly as possible by using it as a rental property. By generating a small rental income from the property you’ll be able to recoup some of your costs while you wait for the right moment to flip it or at the very least stop the property from draining more of your capital.
- Invest in upgrades that make it more attractive – The goal is to not hold onto a property for long. If you’ve decided to gamble on a property and are starting to regret that mistake, then it’s time to get the work done to flip the property quickly and get it off of your hands. Check the demographics of the area and see if there are ways you can make your property more appealing. If Millennials are the hot buyers for the market, look into adding smart home capabilities or energy-saving features. If your demographic is older like Gen X or Baby Boomers, consider adding features that make the home more accessible like first-floor bathrooms and laundry rooms. It might cost you more upfront but will save you the anguish of holding onto this dead weight while you try to invest in better properties.
Comps Give Confidence
At the end of the day, it boils down to this: If you can’t find comparable homes in the area, there’s a problem. There’s a saying I use often: “Comps give confidence” and I believe that to be one of the easiest philosophies to go by when thinking about real estate investing. Not being able to find comparable properties that have recently sold tells me there’s something wrong with the market, the house, or any other myriad of factors.
If I can leave you with anything it’s this: While there are definitely ways to circumvent this “rule” of investing, having difficulty finding comps can be a symptom of a problem that will cost you time, money, and stress. But before you walk away completely, give one of my tips above a try and see if there’s a different angle you can come at this problem from.