COMPS - Comparable Properties

I began writing a different blog today; one on the seminars, books and tapes available for inexperienced real estate investors to make one rich overnight. I realized in trying to put it together that the most abused term was "COMP". People are constantly calling me to run "COMPS" for a property that they are interested in, and for a property I have never seen. I can send "sold" listings for an area, but in no way do they represent "COMPS".

What should a "COMP" be? First, it should have sold, if possible, in the last six months. Second, it should be in close proximity to the subject property. Third, it should be a similar property. Then what?

I like to visit the subject property. (I will be using a row house in this example.) Does the property have a new roof? What is the condition of the yard? The alley walls? The back of the house? The front of the house? The kitchen? The bathroom? The water heater? The heater? The plumbing? The electric? Is there air conditioning? Is the basement finished? What are the floor treatments? What condition are the walls and woodwork? Are the bedrooms well laid out and do they have closets? There are more things for which I am looking, but these questions give you an idea.

Next, I look on the MLS (Multiple Listing Service) to see what SOLD properties I can find to use as comps. Again, I look for properties, 3-5, selling in the last six months, close to the subject property and similar in size and features. Now, of course, there are some assumptions made based on the photos and descriptions. So, how do I come up with an asking price?

1. What have the comps sold for?
2. Was there a seller assist?
3. What was the initial asking price?
   
4. How many days was the property on the market (DOM)?
5. What does the comp have that the subject property does not have?

So, let us take a look at the following example comps.

SUBJECT PROPERTY DESCRIPTION

• House has been well kept by owner. The bricks are original and have been re-pointed; they are in good condition. The windows and doors are new throughout. The back, yard and alleyway walls have no issues. The house has central air. The heater and water heater are five years old. The plumbing is new PVC. The electric is modern. There are old hardwood floors in beautiful condition. The kitchen is older and a little worm, but usable. The bathroom is in mint condition, but old. The basement is cemented, and clean. There is a new rubber roof with a 15 year warranty.

Property A

• Sold: $150,000
• Seller Assist: $7,000
• Initial Price: $145,000
• Days on Market: 30
• Additional Features: new brick front, new windows and doors throughout, nicely finished basement, new hardwood floors in living room and dining room, modern kitchen (not high end), new bathroom, new PVC, new electric, new water heater and new heater, new hardwood floors, central air and a new roof with a 15 year warranty.

Property B

• Sold: $120,000
• Seller Assist: $0
• Initial Price: $145,000
• Days on Market: 145
  
• Additional Features: cement basement/walls need stucco, older re-pointed brick front, older windows and doors throughout, wall to wall carpeting and linoleum in the kitchen, newer kitchen, new bathroom, new PVC, new electric, 10 year old water heater and 5 year old heater, and a new roof with a 15 year warranty.

Property C

• Sold: $180,000
• Seller Assist: $12,000
• Initial Price: $175,000
• Days on Market: 90
  
• Additional Features: central air, beautifully finished basement with wet bar and powder room, new brick front, high end, new windows and doors throughout, high quality hardwood floors upstairs and downstairs, new, modern kitchen with stainless steel appliances and granite counter tops, new bathroom with spa tub and stall shower, powder room on the first floor, new PVC, new electric, new 100 gallon water heater, new heater, and a new roof with a 15 year warranty.

Now what do I do with the information? First, I determine the net price.

Property A

• Sold: $150,000
• Seller Assist: $7,000
• Net Price: $143,000

Property B

• Sold: $120,000
• Seller Assist: $0
• Net Price: $120,000

Property C

• Sold: $180,000
• Seller Assist: $12,000
• Net Price: $168,000

Second, I add or subtract from the Net Price.

Property A

• Net Price: $143,000
• Subtract $10,000 for new brick front (cost is about $20,000, but subject property has a nice front, which does not need to be replaced
• Subtract $3,000 for refinished basement
• Subtract $5,000 for new kitchen/partial credit
  
• Adjusted price = $125,000
  

Property B

• Net Price: $120,000
• Add $1,000 for basement stucco
• Add $3,250 for 9 windows and 2 new doors
• Add $3000 for hardwood floors
• Add $5000 for central air
• Add $600 for central air
• Adjusted price = $132,850
  

Property C

• Net Price: $168,000
• Subtract $10,000 for new brick front (cost is about $20,000, but subject property has a nice front, which does not need to be replaced
• Subtract $6,000 for refinished basement
• Subtract $8,000 for new kitchen/partial credit
• Subtract $4,000 for new powder room/partial credit
• Subtract $3,000 for better bathroom
  
• Subtract $2,000 for better windows and doors
• Adjusted price = $135,000

Now what should I do with these "Adjusted Prices"? I will weight them. I have determined that Property A is most similar, sold quickly suggesting it may have been appropriately priced and will make the following calculation. I will say that Properties B & C are equally, in their own way, similar to the subject property, but since C sold faster I will weight it slightly better than B.

Property A

• Adjusted price = $125,000 * 50% = $62,500
  

Property B

• Adjusted price = $132,850 * 20% = $26570
  

Property C

• Adjusted price = $135,000 * 30% = $40,500
• 
  

Now, I add the three weighted numbers together, I arrive at the following price: $129,570 with a range of $125,000 - $135,000. The example above is one way to run comparables and determine an asking price. There are other methods to determine an asking price and range, but this method is what works best for me.

I warn the consumer that when running comps on the national websites that many times the comps have not sold in an acceptable time frame, they are not close to the subject property and the conditions of the properties are not analyzed. The price range may not even be accurate, because, like in Philadelphia, prices can sometimes change quite dramatically just by crossing a street.

CAPITALIZATION RATE - INVESTING IN PROPERTIES

People are often confused about investing in real estate for investment purposes. When I am speaking of "investment purposes", I am talking about a long term investment where the subject property is a rental property. People know if the mortgage payment per month is $600.00 and the rent is $800.00, they are making money. Or are they?

The best way to analyze a property's potential is to use the income approach and the capitalization rate. What is it? It is how the property will pay for itself or cash flow. Often you will hear people talk about "cap rate". Again, what is it? It is a measure of how fast an investment will pay for itself. Thus, if your "cap rate" is 10% , the investment will pay for itself in ten years. And again, if the cap rate is 5%, the investment will pay for itself in 20 years.

How do you calculate the "cap rate"? It is a ratio between the net income and the price or cost of the asset. So, how do you calculate net income? The example below will give you an idea of how this calculation works. I will use a $1000 rent for the example. I am also assuming this is a 1200 square foot, single family house.

Gross Income (Rents x 12) $12,000
Real Estate Taxes $ 1,000
Utilities (Paid by landlord) $ 500 (Assuming in Philadelphia landlord is paying Water and Sewer - typical)
Insurance $ 1,000
Management Fees $ 720 (6% - could be higher)
Maintenance & Repair $ 600 ($0.50/ft - using 1200 square feet)
Replacement Reserves $ 420 ($0.35/ft - using 1200 square feet)
Snow Removal & Misc $ 400 (estimated)
Vacancy & Collection $ 600 (5%)

Net Income $ 6,760


Now you know what your net income looks like. However, some of these expenses listed above could be different in reality. For example, management fees could be more. In Philadelphia, it is likely that the insurance and taxes could be lower. Also, I have built into this formula that the property is in good condition when rented. I am assuming the roof, systems, kitchen and bathroom are reasonably up to date and functioning.

Now, you need to address the Capital Cost or Asset Price. See the example below.

Purchase price $60,000
Closing Costs $ 4,500 (7.5% - Philadelphia typically 6-9%)
Improvements $10,000 (Estimated)
Asset Price $74,500

The next step would be to take a look at the ratio.

Net Income/Capital Cost = Capitalization Rate

$6,760/$74,500 = 9.07%

Thus, the investment would pay itself off in a little more than 11 years. This is a very good capitalization rate.

Conversely, you may be looking at properties where you know the price. You can quickly calculate a number on gross figures to know whether it is worth even looking any further. I am seeing a lot of properties, currently, that are multi-family. They are collecting, let us say for this example, about $1800/month and asking $500,000 for the building. So, if I want an 6% cap rate, I don't have to go through great calculations to see what is what.

Gross Income/Capital Cost = Cap Rate

$21,600/$500,000 = 4.32%

STOP HERE! We have not used the net income nor have we added closing costs and improvements, and we are at a 4.32% Capitalization Rate. When we add and subtract the rest, the rate will only go down.

If you want to see what you should pay, let us assume that there are 3 units each paying $600 per month. Let us also assume that the building is 2000 square feet.

Gross Income (Rents x 12) $21,600
Real Estate Taxes $ 1,200
Utilities (Paid by landlord) $ 1,000 (Assuming in Philadelphia landlord is paying Water and Sewer - typical)
Insurance $ 1,200
Management Fees $ 1,296 (6% - could be higher)
Maintenance & Repair $ 1,000 ($0.50/ft - using 1200 square feet)
Replacement Reserves $ 700 ($0.35/ft - using 1200 square feet)
Snow Removal & Misc $ 400 (estimated)
Vacancy & Collection $ 1,800 (5%)

Net Income $13,004

So, if our net income is $13,004 and we want an 6% cap rate, which is the average for apartments, what should we pay for the asset?

Net Income/Cap Rate = Cost of Asset (What should be paid including closing cost and improvements)

$13,004/6% = $216,733

If you are trying to achieve a higher cap rate, be aware that many properties allowing for higher cap rates, will usually have higher vacancy rates.

Now, of course, there are other factors to consider when purchasing the property. Will the rents increase? Will the expenses increase? I could go on and on, but the questions may blur the idea of what I have explained herein. Thus, when considering purchasing and investment property, consider how the property will cash flow to see if you are making a good investment or not.

How is a Property Zoned? Licenses and Inspections in Philadelphia

There are endless things, which can be written about the title I have chosen, but I will keep this simple and to the point. As part of your offer, when purchasing a property, you want to make sure that there is a zoning requirement listed as a contingency. Therefore, if the Licenses & Inspections certification comes back with zoning that is different from what you have required on the Agreement of Sale, you are not obligated buy the property.

Recently, I had an offer accepted on behalf of a buyer for a RESIDENTIAL DUPLEX. It was advertised as a DUPLEX. It was laid out as a DUPLEX. I had no reason to think it was not a DUPLEX; they are all over the City of Philadelphia. When we received the L&I certification from the sellers, the property was zoned as a SINGLE FAMILY RESIDENTIAL property, and the block was zoned for SINGLE FAMILY RESIDENTIAL properties alone. The sellers thought they had purchased a DUPLEX. Now, the reality was that many of the properties, on the block, were set up as DUPLEXES. The tax assessors listed them as DUPLEXES on the tax roll to get a higher tax rate, but they were still zoned as SINGLE FAMILY RESIDENTIAL properties.

The process to get it corrected, in brief, was as follows: first, apply for a zoning change; second, get turned down, because the block does not allow duplexes (this process takes about 30 days); third, apply for an appeal. The appeal requires architecturals, forms, plus property considerations like the size of the back yard versus the number of units . If you opt to pay the additional fee for the process to be expedited, you are talking about 2-3 months for the appeal process. Otherwise, it will take at least 4-5 months. There is no guarantee in the end that you will get a satisfactory result.

Now, today, I went to check on two garage spaces. I knew ahead of time that one was zoned "G2" and one was zoned "R10A". Yesterday, I printed a 43 page description of what G2 meant. It was Greek. I was not sure what was permitted and what was not. I called zoning they walked me through the 43 pages and I circled the two lines, which applied to the use my prospective buyer has in mind. It is allowed.

Today, I went to the Municipal Services Building, and down into the concourse level to Licenses & Inspections. I requested the files on both properties. There were none. The G2 seems to be fine regardless. The R10A, however, would need to go through the same process that needed to be gone through with the above duplex. It makes no sense. The owner, before the current seller, was an auto mechanic and used it for his shop. The building looks like a space for a business like an auto mechanic . However, there was, as suggested by the employees at Licenses and Inspections, probably a city ordinance that changed the zoning on the entire block.

Then, I tried to find out what R10A would allow. I could not find it in writing, but learned while at Licenses and Inspections today that the only real exception, to this type of residential zoning, would be a work/live situation for a medical doctor. At least, this is what I understand.

Now, there is no way the property in question is a residential property. We are still, through political connections, trying to find out if the prospective buyer could put the building into the use that he has in mind. So far, the answer seems to be yes. But we have nothing in writing. And are waiting on return phone calls.

The point in providing this information is to tell you to be very careful when buying something other than an obvious single family residential property. Know what the zoning is and know if the use about which you are thinking is permissible. Do your homework! Don't waste time being under contract and having two or more months go by to find out you cannot use the property how you had imagined.

The Tax Credit for Home Buyers under The Housing and Economic Recovery Act of 2008

There is a great incentive for FIRST TIME HOME BUYERS and/or people who have not owned a home in the last three years in the form of a Tax Credit provided by the Housing and Economic Recovery Act of 2008.

How does it work? I will try to make it as simple as possible

1. House must be purchased between 4-9-2008 and 7-1-2009
2. The house must be a primary residence
3. House ownership of spouse will affect your qualification
4. Income: Single: up to $75,000; Joint Filers: up to $150,000 (Singles earning up to $95,000 and Joint Filers earning up to $170,000 can get a partial credit)
5. The credit for Singles and Joint Filers is $7,500. The credit cannot exceed more than 10% of the sales price of the home.
   
6. The credit may be deducted on the 2008 or 2009 return depending on when the house is purchased
7. This credit is deducted from TAXES OWED and not from GROSS INCOME
8. If the credit is more than taxes due, you will get a refund of the credit amount
   
9. This credit is not a gift
10. The credit must be repaid, interest free over 15 years beginning two years after purchase of house
11. If the house is sold, the full balance of the credit must be paid off at the time of settlement

Anyone, who qualifies, should take this credit even if they are going to put the money into savings account. It is interest free and payable over 15 years.

Expectations a Buyer Should Have When Buying a Row House

The first thing to remember when buying a row house is that the property is not new. The next thing to consider is the location. In the city of Philadelphia, what is essentially the same house can be $20,000 or $250,000. It all depends on where it is located.

Now, I would point out the description of the property being sold, and the price. If the property is being touted as A "REHAB", and the price is at the top for the area, you should expect a new rubber roof, a new soil line, up to date electric, GFCI outlets in the kitchen and bathroom, new kitchen with at least a garbage disposal, new bathroom, hookups for washer and dryer, new heater, new water heater, central air, new floor coverings, new paint, new or doors in good condition, a well maintained front and back, an acceptable chimney liner, the yard surface should be sound as well as the walls of the alleyway. Even though the house may be 50 or 100 years old, it should appear to be a new house.

Now, if the property is being sold as a "REHAB" and the price is not at the top of the market, then I would not expect to get a house with the full list above. You may find that there is no central air, the heater or water heater was not replaced, etc.. You should expect that in your first few years of ownership that you will be spending some money to do some of the improvements that were not done by the previous owner. These improvements should not exceed the difference in price between this house and the house described in the above paragraph.

Then, there is the property that needs "UPDATING". This phrase can mean all sorts of things. This property can be the "bargain" or a "disaster". I like, in this group, what I call Grandma's House. It is the property that has been paid attention to by the current owner for the last 30 or 50 years, but has not been redecorated. The systems, the roof, the appliances, the bathroom tile have been continuously maintained or updated, but the house still has drop ceiling and paneling. In this house the paneling and drop ceilings were decorating choices and not put up to cover anything, but perhaps, wall paper. You will find, when you go through this house that is is clean and always has a clean, well organized basement. Even though this house needs work to make it "look" up to date. It generally provides an attractive price and a livable house, which can be updated and decorated as you go.

There is another house that needs "UPDATING". This house is not like the one above. Generally, it is livable, but almost everything is suspect. You may find a 50 year old heater, water stains on the ceilings, old soil lines, out of date electric, and a "real" need to do something about the cosmetics. This house is fine to buy if you get it for a price at the lower end of the area and have the ability to do the improvements, and are aware of approximately what it will cost to do the improvements. Do not buy this house if you think you will not be able to afford the improvements or cannot live through the improvement process. You will be miserable.

Then, there is "AS IS". "AS IS" can mean all sorts of things. It generally means that the seller will not do any improvements or give you a credit as per the results of the home inspection. Some "AS IS" properties are actually in great condition and some are not. I think this is a situation of "Buyer Beware". Even though it is "AS IS", make sure that you have a HOME INSPECTION CONTINGENCY AND A WOOD INFESTATION CONTINGENCY to make sure that you know exactly what you are buying or not buying. If in this situation, the seller has put something in the disclosure like a new roof that does not exist, I would expect at least a partial credit for the roof even if the seller is calling the sale "AS IS". You, however, may not get the credit.

Therefore, when buying your row house consider the following:

1. Location vs. price
2. Condition vs price

Be honest with yourself. Are you a person that is handy? Do you like doing the repairs? Do you mind living through the work process? You must be honest with yourself when making this decision. If you are a first time or second time buyer, make sure you can afford your monthly payment and make sure you can afford to make the improvements that will be needed as you go along.

Realtor Recommended Home Inspectors

I am responding, in this post, to the credit counselor I mentioned in the GRANTS AND CREDIT COUNSELING post.

He accused Realtors and Real Estate Agents of Recommending Home Inspectors that just pass houses without disclosing the "real" condition of the property so that the deal goes through. It is a ridiculous accusation.

In my office, agents use and recommend different home inspectors. I have had buyers go out and hire their own. I attend all of the inspections so I can be informed and witness any problems, which may exist with the exception of the roof. I attend the inspections to help my client's bargaining position and to ask questions, which my clients do not necessarily have the experience themselves to ask. I do not go on the roof, however.

What I am looking for in a home inspector, which I said before is one who will take the risk to provide estimates and also take pictures. I want a home inspector, who is patient with my buyer and will answer their questions. I want good service. Why?

1. To let the buyer know what the actual conditions of the property are,
2. To give my buyer negotiating leverage,
3. To give my buyer the ability to get out of the contract and retain their deposit money,
4. And to make my buyer's home purchasing experience a good one.

There are two things to remember. First, the home inspector is a licensed person and has potential liability. They generally look for everything! They do not want any stone unturned. Yes, sometimes they scare the buyers, and sometimes that is a good thing! Sometimes the buyer should get out of a contract.

Second, your Realtor is a licensed person, and has liability if they are not representing your interests. Further, reputation is everything to a Realtor. If you bought a house, and your Realtor worked in cahoots with the home inspector to hide the real condition of the property, would you recommend that person? No, of course not. Referrals are the life blood of a Realtor, and what this credit counselor accused us of is absurd!

Grants and Credit Counseling

I don't know how it works in other parts of the country, but in Philadelphia, there are multiple types of Grants for which a buyer can qualify. Most of them are income related. Some come from the City of Philadelphia, Some from the State of Pennsylvania, and some from lenders.

What a buyer must be aware of is that the ones from the State and City require credit counseling. In fact, the counseling must be done before an offer is submitted. Thus, if you are low income or moderate income and pursuing one of these grants for closing costs, you must be very proactive and get in to meet with a credit counselor. The lenders may also require credit counseling, however, that must be determined on a grant by grant basis. In Philadelphia, there are many of these groups, which provide the counseling. There are too many to list here. Some are quite good and responsive, and some are not. Either way, be pushy and get in to see the counselor so that you can get on with buying real estate.

An agent in my office recently submitted an offer without realizing the counseling had to be done. So far, they are okay. Her buyer is on top of everything and the two have been scurrying to get everything done. They called all over to get the counseling done. They finally found a counselor who would meet with them Saturday night. She had to drive her client to the appointment so she ended up in attendance.

She said the Credit Counselor was very bright, but spent a good deal of time bashing Realtors. Misrepresented what we make. In fact, doubled it (what we make). Told the buyer not to tell the Realtor if they really liked a property. Told the buyer not to use a home inspector recommended by the Realtor, because they would just pass the house in order to get the sale pushed through. Also, told the buyer not to sign a buyer broker agreement. I have so many issues with what this man said and I was not there! I will address these issues in separate entries!

"AS IS"

We had a discussion today in the office as to what "AS IS" means. We agreed, as per our discussion, that it could have a couple of different meanings in a real estate transaction.

First, it could mean that what you see at "offer time" is what you are buying. Therefore, make sure you make a good visual survey of the property before making an offer, or perhaps, do a property inspection prior to making an offer, or bring a trusted, licensed and insured general contractor through for a good look at property and get his/her estimate for needed items and improvements wanted.

Or Second, it could mean that you still have the right to do inspections, but no ability to negotiate price based on the findings on the inspection(s). In this case, you would include a contingency or contingencies in the contract, which allows you to either accept, or decline as a result of the inspection and get your deposit monies back. So, you would hire a home inspector to inspect the property. When the report(s) comes back, you have a chance to review it/them and sign an acceptance or declination of the contract. If you decline, you are to get your deposit money back. If you accept, you will not be allowed to negotiate the price or assist based on the results of the home inspection.



Thus, if "AS IS" is presented to you, the buyer, in contractual form, make sure you have a contingency to get out of the contract if the "AS IS" condition turns out to be above what you have budgeted for improvements, or future improvements, or in other words the condition is worse than anticipated.

If the seller will not allow you to have inspection contingencies then do it before making an offer or find another property. Of course, there is an expense involved in doing inspections, so make sure you are serious about the property before either entering into a contract or have lots of extra cash on hand to do multiple inspections on multiple properties.

What do you do about your deadlines in an Agreement of Sale?

It is best to address all of them immediately.

Most people will need to do the following:

• Make a mortgage application
• Make sure the property is insurable
• Schedule inspections
• Make a second deposit
• Perhaps, review leases or condominium documents
  

None of these items are based on one another. All of their contingency periods run simultaneously. Thus, a second deposit is not based on the result of the home inspection, etc.. Generally, it is due earlier. Thus, make sure your Realtor gives you a list of deadlines and begin making the phone calls as soon as you have the contract in your hand. You want to make sure you meet all deadlines and protect your deposit and not accidentally default.

Home Inspectors

How do you pick a Home Inspector?

It, typically, is not something you are doing regularly. So, you will not have your favorite home inspector like you may have your favorite electrician or handy man. Thus, what should you look for in a home inspector? And how should you find one?

1. Ask your Realtor for a reference or several, look on the web, look in the phone book
   
2. Call and ask them a few questions:

• Will they give estimates on critical items?
• Will they go up on the roof?
• Will they take pictures?
  
• How long will it take to get the report back?

I would expect that they will give you estimates on critical items. If you don't have estimates, then you must meet and arrange with each contractor to meet you at the property to give estimates. And these meetings must happen before your contingency period lapses if you intend on re-negotiating the price based on those inspections, or rescinding the contract.

I would also expect that the home inspector goes up on the roof and takes pictures so that you the home buyer can see the condition of the roof without climbing the ladder yourself! Again, although, in general, it is easier to get the roofer on the roof than other contractors to come out, who must go into the property, it is best if your home inspector does it at the time of the home inspection. You can always follow up with a roofer.

Pictures... they are nice to have, but best for the roof ,and next for critical items. I would insist on the roof, and would like the critical items, but would not turn away a good home inspector if he/she only gave me roof pictures.

Some provide the report right on the spot. That is a really nice service, however, if they will email within 24 hours, it is also good. It still should give you enough time to review the report and respond to the sellers.

When your offer is accepted, and you have an inspection contingency, please schedule it immediately.