July 26, 2006
Comps Be Damned
Slightly unnerved by today’s less-than-stellar real estate market news (see Sales Slow for Homes New and Old in the New York Times), I decided to revisit the numbers I had crunched long ago when I was trying to decide on an offer price for my current property. Obviously, the expected resale value is a key component of the equation when you’re flipping houses and at the time I had settled on $399,000 as a reasonable target for the renovated property. Concerned that this target may need to be adjusted, I pulled up some recent listings and sales data for my town and decided to take a break from back-breaking brick patio removal (see picture below) to take a walk around the neighborhood and size up the houses I had price information on.
Now this is the paragraph where I’m supposed report back on my findings and discuss how they impact the expected resale value of my first flip, but unfortunately I didn’t get any strong feelings one way or another after viewing nearly 10 comparable properties. I know it’s one of the most widely-used forms of home valuation, but I’ve never liked using comps because it’s such a fuzzy method when you’re evaluating something as unique as a house. This problem is particularly pronounced when it comes to flipping because the flipper is often creating a unique property since individual owners rarely take the time to completely renovate their homes before selling them. Most of the houses on my street were built in the early 1900’s and have piecemeal renovations (maybe the kitchen was done two years ago and the bathroom was done in the mid-90’s), but none of them have been totally remodeled room-by-room. Also, while my house only has one bathroom, many of the other homes have 1 ½ or 2 bathrooms.
Finding a recent sale (or a current listing) of a property with a comparable configuration and similar renovations has been nearly impossible and I’m having trouble assigning value to the different variables in play to adjust the prices of houses that come close to fitting the bill. I think this is mostly a function of my inexperience and my imperfect knowledge of the local market, so I shouldn’t disparage comparable sales analysis too much. I’m confident that my buying agent knew what he was talking about when he helped me arrive at the original $399,000 target and I don’t things have shifted too much since then in my town, so I will most likely stick with that number and plan my budget accordingly. I’m just about to make some major expenditures (new roof, new windows upstairs, demolition and reconstruction of the garage) and wanted a quick reality check before I start writing checks. I think my research today puts my house comfortably in range of my target price and I’m hoping there are enough buyers out there who agree with me when I put it on the market in September.
Pricing is an art, not a science. Prices can change over time and by season. Your REALTOR probably used all the current information at his or her disposal to come up with a value. See: http://cyberrealtor.typepad.com/st_paul_real_estate/
I mentioned your blog on one of my posts. Yours was the only site I found on the internet that is cheese free!
Since you come from a banking background, comparables may seem like a less than objective method of pricing a home, like you said, every home is unique. That said, it does have its advantages. Neighborhoods are frequently inhabited by individuals who desire that neighborhood for similar reasons (good schools - did you check out the schools when purchasing? Always a good idea to stay in great school districts, prices, proximity to amenities -train, grocery, parks, etc.). The nearby houses are about the best indicator of what the market will bear for this house. Stay as close in distance as you can.
Take another look at the appraisal you did when you purchased the home; taking into account the adjustments made for the various differences in your house (like bathrooms, garages, lot size) and the comparables used for that valuation. If you rework those numbers based on your updated house, does that get you anywhere you want to be?
It’s a good idea to re-address the sales price given market fluctuations, planning renovations accordingly if possible.
Isn’t this much more fun than working at a job? I think so.
Thanks for the shout out, Teresa! I’m glad you appreciate the lack of cheese. Also, I enjoyed your post on home valuations. There’s no doubt that computer software has a long way to go before it can even come close to accurate property pricing…
The house has a lot to boast about when it comes to location. It’s on a great block with two good schools on either end of the street (I think one’s a middle school and one’s an elementary school). It’s just over a mile to the train station and then a 29 minute ride to NYC. There’s also an express bus to the city a few blocks away and a local bus on the corner that gets you to the train station. I’m hoping these (and several other) location features will maintain the value of the houses on my street even in a down market.
And yes, this is much more fun than my banking job! Thanks for the great feedback, fivemznyc.