How to pull comps and estimate ARV

What comps are and why they set ARV

Comps, short for comparable sales, are recent sales of houses similar to the one you are valuing. For a flip, the comps that matter are sales of houses in the condition your house will be in after the rehab. Their prices, adjusted for differences, are your evidence for the after-repair value.

Appraisers use the same idea. Fannie Mae's Selling Guide, which sets appraisal rules for loans sold to Fannie Mae, requires at least three closed comparable sales in the sales comparison approach, and says comps that closed within the last 12 months should be used, while allowing older sales with an explanation when recent ones are scarce. Listings and pending contracts can be used as supporting data but do not count toward the three closed sales. (Source: Fannie Mae Selling Guide B4-1.3-08, Comparable Sales, selling-guide.fanniemae.com.)

That matters for a flipper because your buyer's lender will likely order an appraisal built this way. If your ARV is higher than what closed comps support, the appraisal may come in low, and the buyer may ask you to cut the price.

Where to find closed sales

Your best source is usually an agent with access to the local listing service, who can pull closed sales with photos, days on market, concessions, and condition notes. County recorder and assessor records show sale prices and dates for most transactions in many states, though some states do not require sale prices to be disclosed. Public real estate websites can help you see what sold, but check their details against the listing record or the deed because square footage and bedroom counts are often wrong.

Ask for the listing photos and remarks for each sale. The difference between a renovated house and a dated one is often visible only in the photos, and that difference is the whole point of ARV.

How to choose the comps

Location first. Start with the same subdivision or a tight radius, and avoid crossing major roads, rail lines, school attendance boundaries, or changes in housing type, since buyers often price those differently. In rural areas you may have to go farther; say so in your notes.

Then time. Recent sales reflect the current market. In a market where prices are moving quickly, a sale from a few months ago may need a time adjustment, and a sale from a year ago may be misleading. Fannie Mae's guidance treats market condition adjustments as necessary when the data shows a trend.

Then similarity. Look for houses close in living area, with the same or similar bedroom and bathroom count, a similar age and style, a similar lot, and the same garage situation. Most importantly, look for the same condition and finish level your house will have. A dated house that sold cheaply is not a comp for your finished one, and a high-end custom renovation may sell above what your scope will produce.

Exclude sales that were not arm's length, such as sales between relatives, foreclosure auctions, or short sales, unless that is truly the market you will be selling into. Note any seller concessions, since a sale price with a large credit to the buyer overstates what the house really brought.

How to adjust comps

No comp matches your house exactly, so you adjust each comp's price to estimate what it would have sold for if it were like your finished house. If the comp has something your house lacks, adjust its price down. If your house has something the comp lacks, adjust the comp's price up.

Common adjustments are for living area, bedrooms, bathrooms, garage, lot size or usability, condition, location factors such as a busy street, and time. The size of each adjustment should come from the market, for example by comparing pairs of sales that differ mainly in one feature. A dollar figure you read somewhere is a placeholder, not evidence.

Fewer and smaller adjustments mean a better comp. If a sale needs large adjustments in several directions, it is telling you less about your house than a sale that needs one small one. Weight the comps accordingly when you reconcile.

Reconcile to one ARV

After adjusting, you will have a range of indicated values. Do not just average them. Give the most weight to the comps that are closest in location, time, and condition and that needed the fewest adjustments, and less to the ones you had to stretch to use.

Then sanity-check the result. Is it above every closed renovated sale in the neighborhood? If so, you are betting your house will set a new high, which is a risk to name, not an assumption to bury. Does the price per square foot fall in the range of the comps? The ARV calculator on this site multiplies your square feet by a price per square foot you choose, which is a useful cross-check once you have a supported rate.

Finally, plan your deal on a value you would defend to an appraiser, not on the high end of the range. The guide on how to calculate fix and flip profit shows why every dollar of ARV error becomes a dollar of profit error.

Use listings and pendings as a check

Active listings show your competition when you sell, and how long they sit shows how fast the market is absorbing houses. Pending sales show what is going under contract now, which can be more current than closed sales, though you will not know the final price until they close.

If active listings are piling up and pendings are slowing, a value based on last quarter's closed sales may be too high by the time you sell. If pendings are moving fast and above recent closed prices, the market may be rising. Neither replaces closed sales as the basis for ARV.

Example

Illustrative example. Every house and number here is made up so the arithmetic is visible; none is a real sale. The finished subject house will be 1,600 square feet with three bedrooms, two bathrooms, and a one-car garage.

Comp A sold for $318,000: 1,650 square feet, three bedrooms, two bathrooms, one-car garage, renovated, three blocks away, two months ago. Using a made-up adjustment of $60 per square foot for size, it is 50 square feet larger, so adjust down $3,000. Indicated value: $315,000.

Comp B sold for $296,000: 1,580 square feet, three bedrooms, one bathroom, no garage, renovated, five blocks away, four months ago. Add 20 square feet × $60 = $1,200, a placeholder $8,000 for the second bathroom, and $7,000 for the garage. Indicated value: $312,200.

Comp C sold for $335,000: 1,620 square feet, three bedrooms, two bathrooms, two-car garage, renovated with higher-end finishes, one block away, one month ago, with $5,000 of seller concessions. Subtract the $5,000 concession, subtract 20 square feet × $60 = $1,200, subtract $6,000 for the extra garage space, and subtract a placeholder $10,000 for finishes above your scope. Indicated value: $312,800.

The indicated values are $315,000, $312,200, and $312,800. Comp A needed the fewest adjustments, so it gets the most weight. A reasonable ARV for planning from these made-up comps is about $313,000, not the $335,000 headline sale price of Comp C.

Common pitfalls

Using the highest sale on the street as ARV without noticing it had a bigger garage, better finishes, or a large seller credit.

Pulling comps across a major road, school boundary, or into a different style of neighborhood because the prices look better there.

Treating active listings as evidence of value. Asking prices are what sellers hope for until a sale closes.

Trusting square footage and bedroom counts from a public website without checking the listing record or the assessor.

Building the ARV from renovated comps but planning a lighter rehab than they had, so your house will not match the houses you priced it against.

Sources

Fannie Mae Selling Guide, B4-1.3-08, Comparable Sales, and B4-1.3-09, Adjustments to Comparable Sales, selling-guide.fanniemae.com. Minimum closed comparables, age of sales, and use of listings as support.

Steps

1. Describe the finished house

   Write down the size, beds, baths, garage, lot, and finish level the house will have after your rehab.

2. Find closed sales nearby

   Start in the same subdivision or within a short distance, without crossing major roads or school boundaries, and widen only if you must.

3. Keep the recent, similar, renovated ones

   Filter to sales in a similar size range and age, sold recently, in the condition your house will be in.

4. Adjust for differences

   Adjust each comp's price up or down for what it has or lacks compared with your finished house.

5. Reconcile to one ARV

   Weight the comps that needed the fewest adjustments most heavily and settle on a value you would defend.

6. Check it against listings and pendings

   Active and pending sales show the direction of the market but do not replace closed sales.

Questions