Real Estate Comps Part Two:
Formula for Comparables

See Real Estate Comps Part One Here

However many Realtors and investors are still unclear on how to determine a real estate short sale offer that is acceptable to the lender.

The following steps are to be used as a basic guideline on determining what to offer the lender for a short sale acceptance.

The FMV can be determined by evaluating sold, comparable properties in a similar or close proximity to the subject short sale property.

Under state law, the "fair market value" means the amount of cash or cash equivalent that property would bring if sold in the open market under conditions in which neither the buyer nor seller can take advantage of the exigencies (pressing needs) of the other."

Under the code, it doesn't appear that distressed sales should be used as comparables because they involve exigencies or pressing needs.

In reality, sometimes distressed sales are used especially if there are no verifiable comparables that are not short sales or foreclosures.

In normal times a foreclosure is uncommon ... and I would ignore them.

Today in areas where we don't have a lot of foreclosures I still ignore them however in areas with a lot of foreclosures I can't ignore them.

When it comes to market data but there is no hard and fast rule.

If you have enough data through standard arm's-length transactions that is what you should use. When there are virtually nothing but short sales and foreclosures then that is the market.

A realtor will have access to the MLS (Multiple Listing Service) and can create a CMA (Comparative Market Analysis) for the subject property.

This analysis will identify sold comparable properties with same square footage, bedrooms, baths, garage and other similar characteristics as subject property however it will not automatically eliminate the short sales or foreclosures in the area.

Request the Realtors use a sold time frame within 6-12 months when pulling properties in the immediate or surrounding areas.

Usually the short sale lender will not consider any sold comparables that are older than 12 months and that are further away than 2 miles from the location of the subject property.

Evaluating Sold Real Estate Comps Systematically

Contrary to misguided and often popular belief you can use a formulaic system that will work in your favour when determining what to offer on the short sale property.

This system has been around for years but for some reason you may have not heard of it before when dealing with real estate.

You will use the law of averaging to determine value.

The way this works is like this:

Let’s say you have ten sold comparables in an area that are all similar in size, square feet, bedrooms etc.

Here’s how you will apply the formula:

First you would take out the two highest real estate comps and the two lowest ones and average the rest.

Generating Real Estate Comps - EXAMPLE:

You have a property you think is worth $143,000.

You have a Realtor pull a CMA and you find ten sold comparable properties that match the criteria above.

The MLS shows the following:

$159,000
$154,000

$153,000

$161,000

$148,000

$143,000

$146,000

$151,500

$147,000

$149,900

Using our formulaic approach you would take out the two highest sold comparables ($159,000 and $161,000).

Then take out the two lowest sold real estate comps ($143,000 and $146,000). This would leave four out from the sold comparables.

$154,000

$153,000

$148,000

$151,500

$147,000

$149,900

_________

$903,400

You would then take an average by simply adding up the sum of all the sold comparables and dividing them by the total number of properties left. In this case, that number would be six.

Total: $903,400 divided by 6 = $150,566.67

You can reasonably justify the house may sell for $150,567 instead of the $143,000 you originally estimated.

This terminology is slang and often used by real estate investors.

The ARV is similar to the Fair Market Value with a few differences made up by the amount of repairs the investor estimates the property needs in order to sell quickly on the open market using FSBO (for sale by owner) techniques and not using the MLS.

It can be argued the ARV is more of a guess or suggested value derived by using sold comparables from houses that were NOT sold by a Realtor.

One way to explain the difference is a realtor will typically use a FMV and a real estate investor may elect to use an ARV.

An appraiser can use both value methods, but generally sticks to the ones that come from off the MLS unless you show him alternatives he can use. The ARV is a more dependable value than what come from the MLS database.

Appraisers valuing homes for lenders also look at distressed sales, but they are typically required to make adjustments.

When a bank gets a property back, it's in pretty bad condition. A good appraiser will adjust for that condition.

In a short sale typically a good appriser will make an adjustment in value because a buyer has to wait for a significant period of time before closing.

If an investor is buying a bank-owned property the appraiser might put more weight on comparable bank-owned homes sold to investors and less on ones sold to owner-occupants.

Using short sales is more problematic. You are buying from a seller who is the official owner but doesn't have power to approve the sale.

It has to be approved by a lender. That makes it more complicated when trying to find real estate comps.

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