Using Comparables to Perform Investment Due Diligence

For every real estate investment opportunity posted on the iFunding site, “comparables” in the form of a table or a Comparative Market Analysis is provided to support due diligence. This allows a potential investor to check estimates on the value of the property. What exactly is a CMA and how does an investor incorporate comparables into their investment research?

Comparables show the value of similar properties

Comparables provided an estimated range of value for a property. They accomplish this by listing the recent prices for properties with similar features. For homes, the comparison will include the number of bedrooms and bathrooms, total number of rooms, presence of a garage, year built, square footage, land acreage. Using nearby properties’ actual sale prices, a $/sq. foot figure will be calculated. Because there’s rarely a perfectly similar house just sold on the same street, often the comps will use houses sold in the last three to six months, within a few streets to a half-mile of the property being considered.

A Comparable Market Analysis, or “CMA,” is a form of comparables that is distributed in a relatively standard printed table format. It relies on a Multiple Listing Service (MLS), which is commercial database of property transactions, details and tax rolls, available only to licensed users such as brokers and appraisers. Once the user picks the filter criteria, the report is computer generated. Average selling prices, price per square foot and other statistics for similar properties are summarized.

Using comps

Especially with home development/refurbishment investments, potential investors may feel comfortable reading a comps report, because they have purchased their own home and went through the same thought process then. To put the comps reports in perspective, you then could combine a few points of information:

  • Look at the building layout information and photos of the existing property
  • Read several paragraphs explaining what the upcoming project will improve, fix or expand
  • Look up a photographic map of the neighborhood (such as you can get on maps.google.com)
  • Combine the above with property comps to see if you feel the value of the property is worth the planned acquisition price in the project. This gives you a baseline of what the asset is worth, even before improvements.
  • Then, read in the crowdfund listing about the project’s improvement plans and costs. If the plan includes an expansion of square footage or new rooms/bathrooms,  have a second look at the comps to see what that could be worth in selling price.

If you’re inclined, you can do your own quick comparable verification by using a web real estate service like www.zillow.com or www.trulia.com to filter on houses in the neighborhood and compare the project descriptions and listed sale price.

Whenever there is a rental investment opportunity, you’ll also want to see comparables with data about average number of living units, and monthly rent per unit and per square foot.

Cautions with comparables

CMAs typically are printed with standard caveats, such as “market conditions, and therefore forthcoming property sales prices, may vary” versus the comparables. The individual who generates the CMA based on similarity-search criteria also can have some impact on which property comparisons appear. Finally, prices for a similarly-featured property can change even a few streets away if the character of the neighborhood or access to nearby amenities is different.

Comparables are equally valuable for commercial property investments. In these cases, it’s important that the investor is willing to place confidence in the project sponsor about the nature of businesses that could occupy a property, the location (e.g., whether “street traffic” is heavy for a retail storefront), and the relative operating costs and efficiencies versus other buildings that may be older or more modern. For this reason, a crowdfund platform will help vet the project sponsor, to document their experience operating in a particular market and for a certain type of property or building.

In Summary

Comps and the CMA report are a helpful part of the due diligence process when investing in a property. Especially for single-family and smaller multi-family properties, the data presented should be straightforward to a potential investor to understand. Repeat experience reading comps can increase your confidence with real estate investing in general.

Comps should be combined with a review of other information on the opportunity, including the operating team’s experience, the improvement plans, financial projections, and investment operating documents. iFunding provide this information and more with each investment; just follow the information tabs within each listing.