The Myth of Comps
Oftentimes, Realtors show buyers and sellers comps of recently sold homes as if they represent the real estate market. That’s like seeing a Ford Edsel on the road in 1959 and assuming that Edsels, which the Washington Post called “America's most-hyped failure,” were selling like hotcakes. So, just as one sold Edsel most assuredly didn’t represent the market for Edsels, neither does a comp or two represent the real estate market.
In point of fact, the real market for real estate includes far more information than comps can provide. I developed Hyperlocal Market Analysis to provide buyers and sellers with that information. The following tables report on the Belleville, NJ real estate market, but other towns are available upon request. If you are unfamiliar with Belleville, it offers outstanding potential for savvy investors.
An Overview of the Belleville Real Estate Market
The following table shows sales of single-family detached homes (fee simple) in Belleville over the past 4 years. After a 28%, year-over-year decline, the market has stabilized. This is good news because it’s harder to sell homes into a declining market. Condo and multi-family analyses are also available..
Several of the following tables highlight the $264,000 - $276,000 price point range. This is the price point range that our hypothetical investor plans to sell into after the repair of a 3 bedroom, 1 bath home. You’ll see why it’s not such a good idea as we work down this page.
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This scary looking table…
…breaks out the overall sales in the previous table into price points and tracks them over 4 years. Price point analyses like this are fundamental to Hyperlocal Market Analysis because price points behave like individual markets, each having its own supply and demand profile. The most remarkable aspect of this table is the decline of the top-end of the market (houses costing more than $288,000). As a seller…investor or otherwise…the top end is not where you want to be, a fact that will be made clear in the next table. With respect to our investor's target price point, sales declined from 18 to 5 over the past two, 12-month periods.
Hope Springs Eternal
The following table compares recent sales with current seller sentiment (or wishful thinking) as evidenced by the number of active listings by price point. Note the following: (1) The decline in the top-end of the Belleville market, which we saw in the previous table, has done little to dissuade homeowners from listing 47 homes in that highest price point. (2) The $228,000 - $240,000 price point had 17 sales last year and there are only 4 active listings, now. The $228,000 - $240,000 is a good place to be if you are a seller. (3) The $264,000 - $276,000 price point...the one our investor wants to sell into...had 5 recent sales against 8 current listings on 5/24/2011. This doesn’t look like a totally terrible place to be, but you'll see in a moment that looks can be deceiving.
Home Prices Decline in Lockstep
Home price trends are often described in terms of median price (the 50th percentile). This is where half of the homes sold above the median and half sold below it. When I started conducting detailed analyses of markets I wondered whether prices at higher and lower percentiles moved the same way as median prices. The reason is that if you were selling a home that was closer to the 80th percentile, for example, you wouldn’t care much about what the middle of the market was doing. This table, then, compares home prices over the past 4 years and it does so across 5 percentiles: the 80th (where the sale price is higher than 80% of the homes sold), the 60th, median (50th percentile), 40th and 20th percentiles. An across-the-board, lockstep-like decline in prices such as this makes Belleville a generally tough market for sellers and a good market for buyers. More importantly, it is a market that punishes homes that remain on the market too long so our investor's goal should be to land a fast sale.
3 bedrooms rule!
This is the last table in the Belleville overview. It shows the distribution of sold homes by the number of bedrooms they have. Recalling that our investor wants to sell a 3 bedroom home, it’s the sweet spot of the market.
So far, the information you have seen has been fairly general. You’ve seen that sales have stabilized, yet prices continue to slide. You’ve also seen that the top of the market remains weak, and is likely to stay that way in the face of increasing inventories. Now, it’s time to take things up a notch. Suppose you were in the market to purchase an Edsel back in 1959. Under what circumstances would you have the most negotiating leverage? If most Edsels sold, or if most didn’t sell. The answer is obvious, and it’s why Hyperlocal Market Analysis takes into account all listings, not just those that sold.
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Reduce Risk the Hyperlocal Way
This is where we get deeply into the behavior of the Belleville market. This first cut looks at what happened to all Belleville listings over the past 12 months. Specifically, of 383 listings over the past 12 months, 34% sold or went under contract, and a comparable number expired. In general, a profile like this favors buyers far more than it does sellers. .
The second cut isolates our investor's price point of $264,000 - $276,000. Things just got worse.
The third cut takes a look at a different price point altogether...one that we spoke about earlier as being a good sellers' price point. Here's what we said::
The $228,000 - $240,000 price point had 17 sales last year and there are only 4 active listings, now.
The $228,000 - $240,000 is a good place to be if you are a seller.
These three charts make it easy to see that the market has several faces and that there is no substitute for solid market intelligence. But, the story isn't complete yet, because we now need to add bedrooms and baths to the equation.
The $228,000 - $240,000 price point is close to a slam dunk!
Don't be put off by this table full of numbers, because just a couple of them really matter. Relative to the investor's blue highlighted price point of $264,000 - $276,000, only 5 of 13 listings sold or went under contract. However, 15 of 19 listings in the yellow highlighted price point of $228,000 - $240,000 sold or went under contract. In other words, the investor's marketing strategy should have been to purchase a house that could, after repair, be profitably sold into the $228,000 - $240,000 price point. That's the next step in executing this real estate investment strategy.
Pull the Trigger on Profitable Deals
First, conduct a sell-side analysis using actual comps.
This side-by-side format makes it easy to compare houses which are included in the comp list because they share similar features and construction, as well as a selling time of 60 or fewer days. That last point is key because we want to know what sells fast. It’s also far more likely that fast sales will be close to Original List Prices. (Only two comps are shown because of space limitations.)
The result of the comp analysis is an average selling price of $232,400.
The next step is to identify active listings that could sell in the $228,000 - $240,000 price point range providing they were rehabbed to do so.
The big difference between the display of sold comps and these active listings is the buy/sell strategy at the bottom of each candidate listing. For the purpose of this description, we’ll focus on the Spruce Street property. (MLS numbers, addresses and map locations are fictitious.)
In this analysis, all the candidate properties use the same Sell-Side after-repair-value of $235,000. The reason is that we expect to be able to make each of the candidate properties equal in value to the sold comps, which averaged $232,400.
Working our way down the list, the $ Adjustment of $10,000 assures that the house will be listed at an attractive price versus the competition. After deducting real estate commissions and carrying costs, the cash to you at closing will be $215,513.
So, if the repair costs are estimated to be $25,000 and the profit target is $40,000, the house at 487 Spruce Street, Belleville has to be bought for $148,885, which is $30,116 under the house’s current list price of $180,000. Will an offer of $148,885 be accepted by the seller? It’s already been on the market for 101 days, so we know that the current asking price isn’t going to fly. Now it’s a process of finding the bottom and working the numbers, accordingly.
Final thoughts...
I hope this provides you with a good idea of what Hyperlocal Market Analysis...and I...can do for your Real Estate Investment Business. But, as with any investment strategy, there is always the risk of loss so be sure to conduct their own due diligence. That said, this investment strategy is based completely on current market variables, and it is designed for serious investors who are willing to put out multiple offers in order to land the most promising properties.
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My name is Brian McCabe. I am a real estate investor and Realtor with Coldwell Banker Residential Brokerage located at 484 Bloomfield Avenue in Caldwell, NJ. I developed Hyperlocal Market Analysis, along with the investment strategy that you have just read, for the benefit of my clients. I invite your comments and questions and, of course, your business. I am also available to present this investment strategy to real estate investment groups and clubs.
973-865-1863 (cell) bmccabe362@wessex-homes.com 973-226-2577 (office)
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