Episode #15 – An Example of When a Comp Isn’t a Comp
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Welcome EarlToms podcast.
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Today we’re going to get back to a little bit of the value aspect of how you’re pricing your offers and what they’re gonna sell for. Because there’s this is still a struggle in this industry, a lot of people just they don’t have a good understanding of what you’re looking for when you when you’re trying to come up with the value. We’ve had the episodes that you know, discuss, you know, differences in comps, how to value basically with the sales comparison, different episodes with the income approach, things like that. But they’re a little they’re a little small nuances that are typically ignored, but will have a big difference in the value when you come to try to sell something or make an offer and it will likely be dependent on whether or not you get that property sold. So what we’re going to do today is basically give you a rundown of something that happened over the weekend.
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In the market that I’m in, I’ve got a, there’s a broker here that used to actually own a mortgage company that I did 95% of the company’s appraisals when I was appraising. And he sent me a text on Saturday morning pretty early, I was still drinking drinking coffee and trying to catch up on the news of the world and see what was going on. See if we had returned to civilized society or, you know, we were still caught up in rocks and looting and those kind of things. But I’ll give you the the words of the text and things of that nature. I’ll read it to you. And it goes. Got an appraiser question for you. Do you know from an appraisers perspective, does forest parks neighborhood get treated as two separate neighborhoods, there’s one entrance on 280 and another on 41. And they do not connect. I have a listing on the 41 side, and it seems their lower priced homes than the 280 side.
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So I went and I took a I took a look to see what what things were selling for in the area, and he was right there. They’re both considered fourth part. A lot of times developers will go in, in these neighborhoods, if you’ve ever noticed, they’ll start you know, if it’s gonna be a large subdivision, they may start with townhomes in the front. Then they’ll go to, you know, the smaller patio homes right behind the townhouses. You get to you know, your Luxury patio homes after that. And then you get to the big estate lots. And the very back of the of the development. They just they do these in phases. So the reason they do it is to, in some ways try to try to build value. Very rarely do they build the estate houses in the very back first, because if you build the estate houses in the back first, a lot of times, the people with the most money are not going to want to drive through all the potholes in the roads from the trucks coming in and out the heavy machinery, things like that. So they build those in the back. It’s just how it’s done. I’ve talked to countless developers and they’ll say if you know if somebody that’s coming in is going to spend half a million million dollars on a house. You know, they’re going to come in in a nice car, those kind of things so they don’t want to see all the work going on. damage their cars, things like that. So they always build those, you know, last. And what happened with this development was basically it’s kind of it’s kind of located on the side of a mountain. So, one of the, they were both basically built at the same time. They just built one side of it as far up the mountain as they could. And then they had to bring the other entrance in when they kind of got to the top of the mountain so to speak, from the to at side because they couldn’t cut a road to connect the actual neighborhoods. Now you, you probably think, Okay, well, there’s, you know, they’re the same neighborhood, get the houses look very similar. They were all built in the, in a similar time. They’re all 3,000 square feet, or better. This is a development that was built late 90’s early two Thousand so it’s not not that old. But it goes into the the appeal part of it and the access part of it. So what a lot of times what people will see is you’ll see a an area that has been gentrified, but you’ve got a you’ve got a house that’s five blocks away.
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So you come in and you try to Oh, it’s on its way in my bead, but it’s not there yet. So you a lot of people go in and they’ll try to say, Oh, this comp over here, you know, sold for $300,000, but you’re still in a $200,000 area, because the gentrification hasn’t spread to your area. So you try to sell it on the potential. You know that it’s common problem with that is there’s no guarantee there thousands of reasons why the gentrification could stop. The first one that comes to mind is something happen. Until the economy. You know, the virus is a perfect example of that. Even though home sales are they seem last month to be going back up. We’re still far from out of the woods on that. Because what no one realizes on that is still during the foreclosure crisis, we lost 10 million jobs. We’re getting close to 50. Now if we hadn’t already passed it, so we’re five times the amount of job losses now that we had during the foreclosure crisis in 2009. So we’re far from being being over over that. What wound up happening with with this with this listing? I did my I did my search, and I looked at what things are listed for right now. And I looked at what things it’s sold for in the last six months to try to see if there was a difference. virus related as far as what things were selling for Now surprisingly, during the virus houses were selling for more than they were pre virus. So does that mean there’s not a downturn in the market? Or does that mean that, you know, these people got their, got their houses under contract, got their loans before the virus took hold, and it just started getting closed because, you know, a lot of these courthouses got shut down. People couldn’t get records for titles. mortgage companies couldn’t close as many as fast because the social distance and a lot of people working from home, you don’t really know. All you can look at is the available facts in front of you. And the only factor in real estate again, is a sales price. Nothing else in real estate is a fact. Everything else in real estate is an opinion. You just have to have the right opinion. It’s the one time in your life where you need to have the right opinion. So what I found when I was looking at it is this house looked similar that the houses in on the side, the two at side were the difference that I saw was a couple of things. But the difference I saw was this house that he was trying to sell had hardy board siding on the back. These are all brick, multi level. There are two stories, most of them have basements. But he has had hardy board siding on it, the rest of them had like a vinyl siding in the back. They had a better view because of course being on top of a mountain versus being in a mountain. You know, you’re gonna have a better view. The appeal of the house was not as strong as the houses that had sold you know on the hill. So When you look at an appeal thing you’re going back to when, when I was saying that about looking at a house, view it through a woman’s eyes as best you can they’re the ones that are going to make the decision so if it’s not pretty, you know all the makeup unknown it doesn’t have the curves, the angles, things like that. It’s it’s not going to be as worth as much as you know another house because again at the end of the day, whether men would admit it or not, women write the check for houses women determined real estate value. It’s just the man’s job most times, not all times, but most times to go outside make the yard look good. You know, keep up with the Jones’ and things like that. Do the work on the inside, but it’s the it’s the woman’s job. Most times, not all, but most times to design the inside. You know, pick What flowers are going to make it make it look good, that’s typically the woman’s job.
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So this house fighting a couple of those things and actually had, you know, an extra bedroom that these other houses didn’t. But it had a fifth bedroom where most of the others had four. Now once you get to four bedrooms, and you go over four bedrooms, unless you’re just in, you know, Beverly Hills or you know, a very affluent area where they’ve got six bedrooms and 10 bathrooms, you’re the extra bedrooms over four typically irrelevant. They’re not going to get you any extra value.
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So when he was looking at this and he was going through with his owners, what I found out was he told them that they priced it too high and they were having a hard time. You know, getting any activity on it. having a hard time selling it. Because the owner was basically just convinced that the house was worth more. So as an agent, you kind of just let them have their opinion. But an agent is the same as kind of a wholesaler. Because if if you go out to an owner and they say I want $300,000 for my house, but they’re nobody’s gonna nobody’s giving them $300,000 everybody’s coming in and giving them $200,000 offers, you have to let that play out.
11:34
In the owners mind, they have to come to terms with it. They have to have the time and the ability to devalue their property in their own mind. Sometimes you just can’t change their mind. So that goes back to a lot of these that I’ve, a lot of these times I’ve said that you need to have an automation set up because these different wholesalers are going out there. They’re not following up 30 days, 60 days, six months, a year down the road. And if you’re sending just an automated email back out to these people just stay in touch with them. When they when they realize that they’re not going to get what they thought they should or woman, then that’s that’s their breaking point. And when you’re in front of them, that’s when you’re going to get the deal. So my reply after I looked at the at what was what was listed and what it sold, went like this. It looks like the market treats it differently $250,000 to $296,000 sales in the last six months on your side. A $320,000 sale is the only one that I see on the 280 side. an appraiser is going to use the $296,000 comp, the $269,900 comp, and the $250,000 comp. There’s no reason to grab the $320,000 sale. It likely appraises between $270,000 and $290,000 right now. Underwriters and appraisals or appraisers aren’t going to push values right now. top of your range is $296,000 but it’s not adjusted. Yours is smaller than the $296,000 sale. The extra bedroom is over improved for the neighborhood. You have hardy board siding instead of vinyl. That’s a negative adjustment for appeal or quality of construction. A $320,000 listing has been on the market for 1,100 days. Your side is going up lately, but it’s priced too high. He had this house or the owner had this house with an asking price of $315,000 and they weren’t getting any, any real activity on it.
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So whenever I replied back to him with that, what I got back was wow dude, thanks. I knew we were high. And I told her to list it for $299,000. We got an offer for $290,000. Last night, we’re going to counter at $297,000 plus or minus.
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This goes to show that even though you’re in the same neighborhood by name, but you have two different entrances, so what should be an obvious comp is not an obvious comp. So when I sit there and I tell them that your range is $270,000 to $296,000. Then they get an offer for $290,000. I didn’t go back to him and tell him he’s not gonna get $297,000 because his highest sale was $296,000. So that’s outside of his range. And underwriters, mortgage companies are not gonna push values right now with so much uncertainty coming.
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So unless he gets somewhere in the middle of that range at $285,000 ish. He’s gonna have a hard time getting that house through underwriting, because it’s going to be a risky loan for all these underwriters. Investors are seeing it as the same thing because investors buy based on leverage. So, we go back to the one of the rules that I was taught when I was growing up, you buy as though you have to sell tomorrow because one day you will when life gets in the way. So if you buy Without the equity in it, and you can’t move that but you or your family needs money to pay for something the now you’re in trouble because you can’t liquidate and get your get the money that you need for your family when life you know shows up, because life’s gonna win every single time we can. All we can do is just wake up and fight. But we’re still going to get knocked down at some point in time in life. That’s just the way life works. So you got to just kind of go with it, take the punches and keep swinging. But like I say what should have been an obvious comp wasn’t and there there really isn’t a difference of why it’s not an obvious comp. Other than the appeal, the quality of construction, because this house had a little a couple of different little things. I mean, the carpet, couple of bedrooms, things like that was white, and a few got kids. The last thing you want is white carpet. So someone looking at this house to bought this got kids, especially in leather is looking at that going. That’s that has to be replaced because I’m not coming in here and picking up Kool Aid stains and food stains and crayons, stains, whatever it may be, they’re not going to destroy this carpet and make this house look bad. So I’ve got to go get a darker color carpet to hide all of my kids fun. So when you have the little quality construction, the little small updates, things like that. That sometimes it has a bigger discrepancy than it should. But when you look at it in terms of the appeal, because the appeal for it is twofold. Number one, you’re driving in and you maybe you see better homes, maybe you see a nice entrance on the 280 side versus the 41 side. But what it what it really comes down to is something that similar to having a place right on the beach or on the lake, when you go on your back deck, or your front porch, looking through the living room window, whatever it may be. Does it give you a peaceful serenity view? So what does that cause to a lot of people? And that goes back to what I was saying as far as women write the check, because when they’ve handled all the kids all day worked, they don’t they they, they work harder than any man any man, every mother works harder than any man ever thought they possibly could. So when they have those 5-10 minutes if they even get that in a day, to just relax and they can sit there and look out their window or sit on their deck and see water or a mountain view or something like that, that in itself will have a profound impact on the value because it’s the piece being provided to that mother to that woman. And that is something that cannot be discounted. So if you go and you look at, you know, properties and you’ve got a, you’ve got a better view, then the counts do.
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You need to tag that and tag it appropriately, because it’s going to have a profound difference in the value of that house. But you know, that’s where you have to go in and you have to figure out how am I going to get the value to that if, you know, say if you’re in the same situation, to where you don’t have sales on the mountain, but you have sales, you know, he’ll so having to figure that part of it out and Figure out how much more value that view adds versus how much more how much the not having to view the ducts from the value. You’ve got to be able to figure those things out. Because just like with this scenario, is this house worth 315,000? In a year, probably, because it’s already gained, I think was $30,000. Because you had the $20,000. You had a $250,000 sale and the $269,000 sale in January and February. And then come June, you had two sales one was $290,000. And one was $296,000. On the on the hillside that didn’t have the view. So in six months, you had a $30,000 to $40,000 difference in sales prices. So it’s it’s going up at a rapid pace, so in a year, it is completely likely that you’ve got a $310,000 or $320,000 value on that house if the trend continues. But when you go when you think, Oh, this is a, this is an obvious comp. Don’t automatically assume that because there are subtle differences that are going to determine whether that’s an actual comp and any investor will know those kind of things. A good investor Now you might be able to get those one off investors that are going to buy a house here, they’re trying to flip it something like that. But the first time that investor gets burned, you’re never selling him another house again or her, you will never sell them another house, because they’re going to learn that lesson. And every single time from that point on that you try to sell them a house. They’re going to double triple check your numbers, your value, to see if they’re even close to being accurate because they got burned on a deal. They bought from you, because they didn’t recognize what to me is obvious, but was partially hidden because you don’t get you don’t get the understanding unless you’re actually out there driving and you know, the area’s virtual wholesalers are going to run into this problem all the time. But the people that actually have boots on the ground are local investors, and local wholesalers are not going to make this mistake as often as, as the virtual ones are that don’t have the boots on the ground. Because really all you can do is look at street views. look at pictures of if a homeowner sends them to you, and just making make the best educated guess that you can, but you’re going to miss the small aspects that separate the value for these for these houses. So when you go and you’re and you’re looking at houses to count them out to get a value Start actually opening your mind up to what’s the reason that this house sold for $320,000 compared to a house that’s in the exact same neighborhood, just to throw a different entrance, but all these houses look alike. Why are these houses selling for $30,000 to $50,000 less than these other houses? What’s causing that? And unless you can answer that, you do not need to make an offer. And you definitely don’t need to try to sell it. Because you’re going to get in trouble. Eventually, you’re going to start having to cancel contracts. Or like I said, you’re going to get a find an investor that says I’ll get it, they get burned. And your life just became miserable trying to sell them a house if they even ever bought another one from me. So when you see you need to start looking for things that are determined In small differences in values, and once you start looking at those things, it’s gonna become second nature. Because as soon as I pulled up that map and saw what what was what was selling, I could already see it, I knew that when you have that kind of spread, there is a reason. It’s just up to you to figure it out, to be able to report on it, and make a solid decision as far as what to offer, what to sell for.
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So you need to need to get these things to become like a second nature to you. And once you do that, you can almost come up with comps in 30 seconds. Because it’s like, like what I did, I saw that map. And immediately I knew there’s not a single reason to go pull that $320,000 comp. It’s not going to fly. So we’re in between $250,000 and $296,000. Let’s figure out what And as soon as I did that, I might have had a $46,000 variance between sales prices from the bottom of the range to the top of the range. But I knew 100% 150% that my value was gonna be within $250,000 and $296,000. It was going to be somewhere in there, there was no reason whatsoever for me to go over $296,000. And that led me to investigate the reason why, and come up with the value to $270,000 to $296,000. But all that was going to be dependent on how would adjust it out once you put it on a on an appraisal form, square footage, appeal design, basement, how many bathrooms how many bedrooms, you know, things like that view. And unless I put it on the appraisal form, there was no way I was going to be able to come up with the adjusted the adjusted sales price, which actually determines the range What it’s going to sell for, which is another reason I always suggest to just go download an appraisal form, put it on a spreadsheet if you need to, and just start going through adding and subtracting. And once you do that, enough times, if you if you did that 10 times, your offers would become better. And you would actually be able to get more houses under contract. Because one thing that that I’ve found over the years that sellers won’t, is somebody that knows what they’re doing, knows what they’re talking about, and trust that they can do what they’re saying. So if you go in and you are armed with that kind of knowledge of why theirs is not why theirs is you’re going to get that deal because 95% of the other wholesalers that are out there. I mean I had one not too long ago. I’ll give you I’ll give you this price, because I have Make $25,000 off of every house that I make. No seller wants to hear that. There’s not a seller in the country that wants to hear that. So he just lost the deal. Because he was crew, you have to go in and explain it in a way that shows that you actually know what you’re talking about. And once you do that, you’re going to get more deals. So like I said, just get that form, put it on an Excel spreadsheet, just start adding and subtracting 10 times, you’re going to make better offers, you’re going to get more properties under contract, you’re going to be able to go back and forth with an investor that says, hey, I think it’s worth this. And then you’re gonna say, what about this? And I want and think about that, or Yes, I factored that in. You’re not always going to be able to change your investors minds. But when they actually see that you’re taking into consideration the same things they are. A lot of times you’ll wind up finding that they drop their guard with you. And just if you say it’s worth something, they start taking your word for. So you got to be accurate on it. Because again, if they get burned, it’s gonna be hard time with you from that point forward. But that’s where you start building your relationships with the sellers and the investors. The more you know, the more you sell it just that simple. So always remember, the more you know, the more you sell. We hope you’ve enjoyed this this episode. Always remember, even though the most obvious things are typically run into your nose. So when something looks like it’s obvious, don’t take it for granted. investigate it, make sure go about your business in a way of learning as much as you possibly can, so that you can sell more and once you do that, you got a good chance of Write in your own ticket. And what that we’re going to we’re going to bring it to a close but like I said, I hope you’ve enjoyed this episode if if you want any kind of more information about growing your business getting more knowledge, things that are not just fluff. Visit EarlToms.com
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We have a lot of things on the website that are business related, not trying to sell you courses or anything like that. Just trying to help you grow your business, get you a solid foundation so you can be successful. But again as EarlToms.com.
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We want to thank you for listening and we will see you again in a couple of weeks.
