Investors beware! Faulty comparable values can cost you thousands

Faulty comparable values

For single family residences, the value of the property is appraised by the selling prices of similar properties, in a similar neighborhood during a specific time.  There are rules that appraisers use to determine the value.  These appraisers are trained and have a strict code of ethics.  Their independence and competence are what lending institutions rely on.  In this article, I will explain common mistakes that amateurs make when bringing you that "deal you can't pass up."  I assume people are making honest mistakes.  Honest mistake or not, it can cost you if you are not diligent.

Define the Problem

  When we first started investing in property, we were learning the ropes and looking for "deals" everywhere we could.  I was new as a real estate agent.  My husband and I were feeling our way.  On many occasions he would come back from a networking meeting with deals from wholesalers.  The deals showed great fix and flip or fix and rent potential.  Leaving aside the repair assumptions, we went to the MLS to verify the comparable data.  More often than not disappointment ensued when the deal turned out to be only good for the wholesaler.  The After Repaired Values (ARV) were inflated.  We questioned our ability to run comps.  How could it be this far off time after time?  We dug deep into the data and found these inconsistencies.

Rules for Comparable Property Value Data

1.  The age of the property should be within about five years.  We found the houses used for comparables were widely different in their age. A mid-century modern and new construction are not comparable.
2. Do not cross a major road.  We decided to drive to see what was going on.  Some of the comparable properties were across roads in neighborhoods no one would consider the same. 
3.  Beware of school district changes. In south Arlington there are two neighborhoods were the houses dividing the two are next door.  Neighborhood A is in the Kennedale ISD with homes built in the late 70's.  Neighborhood B is in Arlington ISD with homes built in the 90's.  The level of trim quality of construction are vastly different.  No appraiser would consider the two neighborhoods comparable.  Homes in neighborhood B sell for considerably more.
4. The size of the properties should be at least within 400 square feet.   Price per square foot varies depending on the size of the house.  Beware of prices that are way out of line.
5. The data should come from the MLS.  The sales price in the courthouse is the financed amount not the sales amount.  Zillow, Trulia and other data are not always reliable.  

               A                                               B

Conclusion

These mistakes listed above were the major factors contributing to differing values between the "hot deals" and our analysis.  Other factors come into play on comparable data validity.  The best advice is to seek out trusted professionals with access to accurate data.  

You can download my mobile app or set up custom MLS search alerts with jodywallrealtor.com.  I will be happy to work with you to secure the deals needed to run your business.