The Problem With Software Generated Comps
We are frequently asked the question "Why are your manual comps sometimes quite different from the comps shown in the investor tool?" (Note, the investor tool is a subset of our internal tools which we provide to our active investors.)
We talked about how to calculate comps in our July news article Estimating the Market Value of a Property. (6 min read) While the calculations are relatively easy, the hard part is selecting the right comps.
The Challenge with Comps
In order for a comp to be "comparable", it must meet all of the following criteria (in no particular order):
- Similar type: For example, a condo is probably not a good comp for a single family.
- Similar size: I prefer that the comp be within 10% of the SqFt of the subject property.
- Same number of levels: If the subject property is a single story, then the comps should be single story.
- Similar age: I prefer that the comps be within 5 years of the age of the subject property.
- In close proximity: I prefer that the comps are in the same subdivision and if this is not possible, then less than 1 mile.
- Bedrooms: Same number of bedrooms
- Baths: Same number of baths
- Parking: Same number of garage spaces, car ports, spaces, etc.
- Condition: All comps are in similar condition as the subject property
- Surroundings: All the comps are very similar. For example, all have the same view, etc.
- Amenities: For example, all have a pool, etc.
- Recent sales: This is market dependent. If the market is very stable, comps sold within the last 6 months might be acceptable. In a rapidly changing market, it might need to be within the last 30 days.
- Lot size: I prefer that the comps lot size to be within 20% of the subject property.
- Sufficient quantity: The minimum number of comps I am comfortable with is three.
Unfortunately, you rarely find multiple comps meeting all the above requirements. So, you have to use judgment to select the best available comps. "Judgment" is where software fails. Below are just two examples of where software selected comps are likely to fail.
The subject property is in close proximity to two very different subdivisions in terms of $/SqFt. One is ~$180/SqFt and one street over the properties are averaging $300/SqFt.
The subject property is adjacent to a major freeway (noise!) while the comps are away from the noise. There is no practical way for software to determine that a property is close to such a nuisance like a freeway. It all depends on the specific property and the market. Only by looking at the aerial view would you even know this is a problem.
There are many such cases where software will fail to select the best comps because it lacks judgment and experience. And, there are cases where there are no valid comps. This is not uncommon and then it is difficult for even an experienced Realtor or appraiser to correctly estimate the market value.
Manual Comps Example
While all the above is good, I like real world examples. A client (thank you RC) asked us about a property that appeared in the investor tool. That property is 1932396 - 9308 Chilly Pond Av. So you can see the difference between the software generated comps vs. the manual comps, see the summary below. Here is the link to a video I took of the property. Here is a link to the Zillow page for basic information and photos.
As you can see, the results are quite different even though the comps selected by the different methods were not that different. However, comps alone are not enough to approve an investment property.
Our Approval Process
We use a multi-step approval process. The first step enables us to eliminate almost all properties that are unlikely to be worth consideration as investments (through software). Each remaining property must be approved by each individual before we close on the property. Note that there are also financial metrics the property must pass in addition to human review, but I will not get into the analytics in this article.
The value of our multi-step approval process is that you have people with different skills and different prospectives each evaluating each property. And, if any person (or the analytics) rejects the property we do not proceed.
While computer selected comps have problems, they are only the first step of a proven multi-step process every property must pass.