When you are learning how to wholesale real estate, one of the most important things for you to understand is comparable sales.
The reason for this, is because the way you determine the After Repair Value (ARV) of a property is based on comparable sales.
Most new real estate investors get comps wrong by relying on free services like Zillow, the MLS or the Property Appraiser Web Site.
Why is this a mistake? Because none of these services show you:
In order to evaluate comparable sales, when you look at a sold comp you need to know if you are looking at a retail sale with a mortgage and an appraisal or a cash purchase by an investor on a distressed property. You also need to know if the seller was a bank like in the case of an REO or Short Sale and whether or not the transaction was arms length or not. It also helps if you can see the name of the lender, and establish whether it is a private lender or a regular retail lender. All of this information is crucial in order for you to understand the comparable sales.
Another problem with free services is that some of the services simply omit data.
For example, the MLS comps that are given to all realtors only shows comparable sales on properties that were LISTED ON THE MLS.
So if I sell a property to one of my students that sale WILL NOT show on MLS comps.
If I purchase a property from a wholesaler or a hedge fund for cash that sale will not show up on the comps
Considering that is how I purchase most of my properties, the MLS will not show ANY of my purchases. The appraiser will but they will get it wrong too since they don’t factor assignment fees into the Purchase Price (the person working for the County usually uses the purchase price on the contract). That works in most cases for retail sales. But it won’t work for cash sales.
I find training real estate agents the most difficult simply because they fail to recognize that MLS Comps are only showing part of the information.
Other problems with using Zillow and the Property Appraiser is not being able to separate arms length transactions from non arms length transactions.
For example if a couple get divorced, and the wife is keeping the house then usually the husband will be removed from the title to the property. In some cases they will do a quit claim deed for $100 which is obvious. But sometimes they will try and do a quit claim deed for a larger amount (but less than market value) and it will appear as if it is a sale (when it is not). The same issue happens when parents transfer properties to their kids. If you consider that one in two marriages ends in divorce, and that older parents often transfer properties to their kids, then you cannot afford not to see whether the transaction is arms length or not.
Comparable Sales is one area where you simply cannot afford to not have reliable data.
You can download a sample comparable sales report that we use with our students below: