How to Comp a House (EVEN During a Housing Correction)

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined today by Jamil Damji and James Dainard. How are you guys doing?

Jamil:
Amazing. How are you?

Dave:
I’m great because this show is going to be completely self-serving and an abusive power on my behalf, because I want to learn something about real estate from you guys. I invited you here so I can learn, but then we’ll record it and so all of our listeners can enjoy and learn as well.

Jamil:
Awesome.

James:
I’m excited because I love talking about deals. It’s a deal junkie day. We get to look at properties and cut them up.

Dave:
Exactly. If you all don’t know, I have been investing for 12, 13 years, but I really just invest in long term deals. I’ve never wholesale a house, I’ve never flipped a house, but I want to. Part of hosting this show, which is great, is that I get to talk to these very interesting people, but you also, or at least I, get extreme FOMO every time I talk to you guys or some of these other investors because I want and get to hear about all these cool new strategies. These aren’t exactly new, but all these great strategies that are working for you all. I want to partake.
I’ve been thinking about flipping my first house with a partner, because I live in Amsterdam so I’m not going to be actively doing it, but I really have some fear about it and I’d love to learn how to comp better, particularly because we’re in this very weird market that is correcting and now it’s a little bit hotter as of when we’re recording this in early April, but it’s very confusing to me. I’m hoping that you guys can teach me a little bit about comping, particularly in this type of market.

Jamil:
Well, Dave, it just so happens that comping is one of the dear passions that I have. It’s interesting, people have so many fun hobbies. They fly fish. For instance, James Dainard likes to yacht.

James:
Yes.

Jamil:
I find a zen-like meditative release by comping houses.

Dave:
That I believe. I definitely know you have a genuine passion for this. James, is the same true for you? Do you love this?

James:
I’m with him. I do love this. I’m a true deal junkie, looking at deals all day, but I get the opposite effect. I don’t get zen. It’s drinking 10 Rockstars. When I find that deal, my adrenaline goes through the roof. It’s not zen, it’s the opposite.

Dave:
Well, have you drank 10 Rockstars right before you comped that deal?

James:
It depends on the time of day. In the morning, I won’t be that deep in, no, but usually I do try to look for my deals and comp things first thing in the morning and the end of night. 7:00 in the morning, 10:00 PM at night, open the day, shut down the day. I guess it is a little zen because it puts me to bed.

Dave:
There you go.

James:
I feel like I’m not missing anything if I do that last little check.

Dave:
Jamil, what is it that you love about comping so much?

Jamil:
Well, I think the thing that is the most attractive to me with comping is that it’s like math. If you follow the formula and if you plug in all the right variables and put the puzzle together right, you can come up with a very specific answer. Even though comping can be looked at as an art form, as well as very scientific, the beautiful thing is, is that creatively people can approach it from different ways, but we very, very often come to the same answer.

Dave:
That approach. I’ve always respected it, but I think what’s happened over the last few years has proven that this is a real skill that investors really need to learn. Because from my perspective, I have some training and experience with machine learning and writing algorithms and it’s really interesting to see that. Although a couple years ago, I would’ve assumed that machines would’ve been able to do this and do this better than humans. What’s happened with iBuyers like Opendoor and Zillow has proven that that’s not true and that there is still a skill and knowledge that you as an investor can learn and need to learn to do this really well. I am very excited to learn a little bit about this from you guys.

Jamil:
Amazing.

Dave:
All right. We are going to take a quick break, and then we’re going to come back and James and Jamil are going to teach me how to comp. All right. What we’re going to do is James and Jamil both have different expertise and specialties. Each of them are going to share with us their comping philosophy, and we’re going to start with Jamil. Jamil, can you just tell everyone, if you’re not familiar, what comping is?

Jamil:
Yeah, absolutely. Comping, basically it’s short for comparing, right? We’re comparing two houses to get a determination of the value of one. In order for us to understand how much something could be worth once value is put into it, so like an investment is made to beautify it or to bring it up to a current retail standard, you need to have some pretty common characteristics to be able to say, “This house and this house compare.” The way I like to think about it is you want to make sure that if you are growing apples, for instance, that the apples that you’re growing are the same apples grown from the same orchard in the same tree, in the same soil, so that it’s all very, very, very alike.
That is how you can say, “This home could be worth this much because these factors all line up.” Now, here’s the thing, it’s rare for everything to line up. It doesn’t happen that often. Now, again, builders lost creativity… From early 1900s to the mid 1900s, like 1950, 1960, there was so much variety in homes. You would have a Victorian next to a Colonial next to a Tudor. All these builders had all of these beautiful architectural designs that would make neighborhoods feel so different. As building became more commercialized, you would find these master plan communities would have five houses.

Dave:
Yeah, they would just reverse the layout. It would be very confusing to walk into two of them.

Jamil:
It makes it easier for us to compare houses as we’ve gotten farther and farther away from the creative process. But because things don’t necessarily always line up, we have to make adjustments. We have to be able to say, “Okay, if this house has an extra bathroom, or if it’s missing a bedroom, what would the adjustment in value be?” What I did, Dave, is I sat down with a hundred appraisers across the nation, because as you may or may not be aware, KeyGlee, my wholesale company, we do business across the nation.
I need to be able to value homes across the United States and do it pretty accurately so that I don’t make mistakes and I’m not purchasing homes and overpaying for homes, or that I’m also not undervaluing homes and not offering enough. I need to be able to see what is the maximum amount I can pay for this house in this condition so that I can make good business decisions. I can also then help the folks that are a part of my coaching or my franchisees make good business decisions. In interviewing these 100 appraisers, I found some very common rules, and these are rules that almost every appraiser follows.
Now, if you’re watching this on YouTube, you can probably find the document in the description, or if you’re listening to this on the podcast, just check the show notes and there’ll be instructions on where you can get this document, but I’d like to show you how this looks.

Dave:
Jamil, while you’re pulling this up, can you just tell us why you need to be so good at this as both a wholesaler and a flipper? What is the importance of being good at comping?

Jamil:
Well, great, great question, Dave. The reason why you have to be good at comping is because as real estate investors, we are trying to determine how much something could be worth, if there’s an actual opportunity here. And if we are looking to find an opportunity, we need to be able to know what is it worth before a risk is taken or before money is invested. As a business person, which if you’re a real estate investor, you are a business person, as a business person, it makes sense for you to have a good understanding of how much things are worth.

Dave:
If I’m going to go flip a house, there’s a few variables. I need to understand what the purchase price is, what the rehab costs are, and then the third one, which is how much I can resell the property for eventually, which is where comping comes in, because you can get a very good idea of what you’re going to buy something for. Eventually you’ll know exactly what that is.
As you become more experienced in flipping, which I am not, I assume you get better at estimating rehab costs. This is just seems like a crucial skill for both wholesalers and flippers and really any type of investor that’s doing any value add. Even if you’re going to do value add and hold onto something and rent it out, you still want to be good at this.

Jamil:
Absolutely, yes. From the standpoint of a wholesaler, why you would want to know how to comp is wholesalers are selling potential. We’re looking at a property and saying, “This is the potential of this. If you did this renovation or if you spent money here and fixed this here, the house could be worth this much. That’s why I’m owed or that’s why I believe that you should pay me five or $10,000 to give you this opportunity to flip because I’m showing you what the potential that exists in this property is.”
If you’re a flipper, you need to know, if I buy this house for this much money and I spend 50 or $60,000 renovating the house, will I actually be able to sell it for this value and make money, or am I going to just break even and lose money? If you’re a buy and hold investor, if you are buying a home and then renovating it and then hoping to refinance it and pull your cash out, you need to know what it’s going to appraise at. That’s why these appraisal rules are so important. Regardless of whether you’re a wholesaler, a fix and flipper, or a buy and hold person, it’s important for you to understand how to underwrite and determine value.

Dave:
Beautiful. I love it. You have some appraisal rules that you use basically for comping across the country, is that right?

Jamil:
Correct. The appraisal rules, again, like I said, have been derived from interviewing 100 appraisers across the nation, and these were the commonalities that I found. Now, before we move any further, I do want to say, for 2023, we are wanting to use comps that are no older than six months. Right now, appraisers, in fact, they would prefer to use a comp that is no older than 90 days, but they will go as old as six months, but no older than that because we’re all aware the market has shifted and you can’t use comps that are older than six months because the direction of the market has changed.

Dave:
Can you just give us some context? In normal times, how old of a comp would you use?

Jamil:
Well, before the market turned, appraisers would have gone back as far as 12 months because the market was going in one direction. Here’s the thing, if there was a comp that they found that was 11 months old, because the market was still going in the same direction, meaning things were worth more than they were 11 months ago, you could use that comp from 11 months ago because the house was only worth more than what that number was giving us.
An appraiser, if there weren’t a lot of sales available or a lot of sales activity available, instead of leaving a subdivision, which we’ll talk about here shortly, instead of leaving a subdivision, appraisers would time travel. They would actually go back. You can see this right here. It was better to time travel than leave the subdivision, whereas now it’s actually better to leave the subdivision than time travel.

Dave:
That’s interesting. In a normal time, let’s say in 2021, if an appraiser goes out and creates a comp and they find a great comp from nine months ago, with how quickly the market was growing, were they adjusting it, like saying, “Okay, we know the market generally went up five to 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}?” Really if there’s no good ones in the area, are they generally just older and not taking into account the last six, nine, 12 months of data?

Jamil:
Yeah, they’re not going to just give you appreciation without evidence. The reason for that, Dave, is because the job of the appraiser is to protect the lender.

Dave:
They’re being conservative.

Jamil:
Unless there’s actual evidence to prove that value exists, they’re not going to just extrapolate it for you and give you an additional five or 7{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of value on your house. Because again, the way that it’s looking, they want to protect the asset, they want to protect the loan, they want to make sure that their number is accurate, and they’d prefer their assessment to be more conservative than accurate. Now, looking at these appraisal rules, again, we always want to try to stay within the same subdivision.
That’s something that appraisers will typically do. I’ve seen many would-be wholesalers or fix and flippers make errors where they will ignore a comp within the subdivision, so a viable comp within the subdivision, and they’ll actually leave the subdivision to tell a better story of value.
Actually, wholesalers are very, very, very guilty of this because they’re trying to share or trying to paint a picture of what a property’s potential is and they will just ignore, they’ll ignore a house in the same subdivision behind our subject house or a couple doors down and opt to use a sale from a completely different neighborhood just to try and prove that this house if having an investment made to it could be worth $100,000 more than what it should be. Generally speaking, you don’t want to leave the subdivision.

Dave:
Because otherwise, you can comp something that’s maybe as the crow flies a 10th of a mile, right?

Jamil:
Yes.

Dave:
It looks like it’s close, but it’s in a different subdivision and might have different quality of homes or just a totally different character or whatever it is.

Jamil:
Exactly. Have you ever been in a neighborhood, and this is very, very common in these major metros in the United States, but you ever been in a area where you walk for two minutes and the neighborhood just completely changes?

Dave:
Yeah, of course.

Jamil:
A few streets over it, we’re talking about night and day difference.

Dave:
Totally, yeah.

Jamil:
This is the reason why, right? You don’t want to be looking at properties outside of your subdivision if there’s comps that exist there, because things can change one block over. It’s funny, here in Phoenix, Arizona, we have these historic districts. You can literally be looking at a house in a historic district and one street over, it’s not in a historic district, you’re outside of the historic district, and the values drop by $100,000 or more. It’s really important to pay attention to these things. Again, you want to try to stay within the same subdivision. Another rule that appraisers will use is they won’t use or compare properties that are more than plus or minus 200 square feet apart in size.
Here’s the reason why. As a house gets larger, its dollar per square foot value starts to decline. Smaller houses have a higher dollar per square foot value. What many wholesalers who are just getting started accidentally do is they’ll see a renovated comp, say it’s 1,000 square foot house, and let’s just say the subject house they’re looking at is 3,000 square feet. It’s the largest house in the neighborhood. They’ll mistakenly take the dollar per square foot of that 1,000 square foot house and they’ll apply that dollar per square foot to a 3,000 square foot house.
Now they’ve got this crazy number they think this house is worth because they used an incorrect dollar per square foot extrapolation. You can only use the dollar per square foot extrapolation plus or minus 200 square feet.

Dave:
That makes sense to me. If it was a big house, let’s say it was 4,000 square feet versus 4,400, does the same principle still apply?

Jamil:
Yeah, I think that that rule starts to get a little bit less constrictive as you get larger in home. It would make sense to me that you could use a 4,400 square foot comp and a 4,000 square foot house. That makes sense. That 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} does feel right. However, it’s still less accurate. If you can find… Again, the more you break these rules, it doesn’t mean you’re wrong. It just means that your value is becoming less and less and less accurate.

James:
Price per square foot’s like a good value check, but I wouldn’t ever use it to put the value on. Typically, you can see where the clusters are in those segments. 3,500 to 4,000 is going to be around this range, 2,500 to 3,000. You go in ranges of 10 to 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}, and then you can narrow that price per square foot down a little bit more.

Jamil:
Exactly. The next thing that you want to do is you’re always wanting to make sure that you want to compare properties that are of the same type. Let’s just say for instance, you’ve got a single story ranch, and your comps are mainly two-story houses. They’re not the same, right You want to compare single story ranches to single story ranches. You want to compare two-story houses to two-story houses. You want to compare Colonials to Colonials, Tudors to Tudors. You want to make sure that your property type is the same. Again, another example here in Phoenix, Arizona, the pitch of the roof can even qualify as a reason for value discrepancy.
For instance, single story houses here in Phoenix, if they have a pitched roof, are worth roughly 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} more than flat roof homes. You want to compare houses that are of the same property type. Now, again, guys, the way to know if you’ve left a subdivision or not, I just follow this rule. If I’ve crossed any major roads, there’s a chance I’ve left the subdivision. That’s it. I can keep myself pretty honest and I can keep myself pretty accurate by making sure that I’m not crossing any major roads. Now, if you’re using any comping tool, typically major roads are different colors.
You can just see, oh, the thickness of this line or the color of this line is different from all the other street lines or street colors, so this must be a major road. Whatever comping tool you’re using, just try to get an understanding of what the legend is or what the different colors or the different widths of the line stand for. And then the next thing that you want to pay attention to is the construction technology or what I call build generation. For the most part, appraisers will only compare homes that are within plus or minus 10 years of construction of each other.
And that’s because the technology of building has changed and it changes so rapidly. Pretty much every 10 years, the construction technology is completely different than it was 10 years prior. Now, where this rule doesn’t really apply is in the late 1800s to the early 1900s. There wasn’t great strides in building technology made between 1870 and 1930. We tend to find appraisers use comps fairly liberally in those late 1800s and early 1900s. But once you get past like 1930, they typically don’t like to compare homes that are more than 10 years apart in build construction year.

Dave:
That makes sense. That makes a lot of sense.

Jamil:
Now, again, as I’d mentioned earlier, you’re not going to have the same house all the time. Let’s just say, for instance, your subject house is a two bed, two bath, and the comp that you’re looking at is a three bed, two bath. You need to be able to accommodate for that bedroom’s value. Or let’s just say your subject is a three bed, one bath and the comps you find are three bed, two baths. You need to be able to accommodate for what that bathroom’s value is. These are general values that appraisers are using for bedrooms, bathrooms, pools, and garages.
For a bedroom, that value can be worth anywhere from 10 to $25,000, depending on the price point of the house. A bathroom is worth plus or minus $10,000. A pool, this value is the one that actually really irritates me the most. An appraiser will only give you plus or minus $10,000 in value for a pool here in Arizona. I’ve built many pools and I’ve never built a pool for $10,000. They cost upwards of 30 to $50,000 to install, yet an appraiser will only give you $10,000 in value for it here.

Dave:
I heard once that pools bring down the value of houses in some neighborhoods. I’m sure in Arizona that’s not true, but I grew up in the Northeast and people never built pools because they apparently brought down the value of homes.

Jamil:
Depending on where you live and the maintenance required, they can absolutely be a hindrance.

James:
And that’s true. That was true. In a Pacific Northwest, you got a pool, that’s a negative, higher insurance, dangerous. But ever since the pandemic, that changed. It’s all of a sudden pools got you a premium in Washington.

Dave:
You use them like two weeks a year in Washington.

James:
And not only that, there’s not very many pool companies here, so you’re paying two to three times more than you’ll pay in Arizona for a pool. I got a couple quotes and I was like, no, not doing it. I’m filling this thing in.

Jamil:
A garage is worth plus or minus $10,000 and a carport worth plus or minus $5,000. Now again, this last adjustment is something that we want to take into consideration and it differs based on price point. I’ve seen many new wholesalers, new fix and flippers make this error. Guys, pay attention to this. If you are siding, backing, or fronting traffic, commercial or multifamily, you have to make an adjustment in value. Let’s just say, for instance, you’re in the price point under 500,000. If you are siding or backing traffic, commercial or multifamily, you want to adjust down $10,000. If you are fronting traffic or commercial, you want to adjust down about $20,000.
But then when you get into more luxury price points over 500K, if you are siding traffic or commercial, will give you a 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} hit. Instead of 10,000, it’s 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. If you’re backing traffic, multifamily or commercial, it’s 15{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. If you’re fronting, it’s 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. I actually just recently, we accidentally committed to and took down a house that was not only on a major road, but also fronted some commercial. The comp that we had used to determine value was one street behind us and the difference in value was over a $100,000. When it all shook out and we were actually able to sell the property, we had missed the mark by about a 100K.
It was right on the money at 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} for a value adjustment because of the traffic and the commercial that was there. Now, the last little bit that I want to say and that’s usually just for any additional dwelling units or basements, typically what I’ve seen, and James is going to have a different assessment of this, but typically what I’ve seen is appraisers will typically only give you 50{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of value for basements or ancillary dwelling units depending on the level of finish. But again, that’s regional, and so that value may or may not be different in different markets.
It’s something that you definitely want to check into with fix and flippers or appraisers in your local area to see how much value they’ll give you for a basement renovation and for any ancillary dwelling units.

James:
Again, that’s a huge point that Jamil just pointed out, and it is regional, so you got to look into it. But when you have a basement, if you have 1,000 square feet up and 1,000 square feet down, they’re only going to count that square footage for value purposes at 50{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56}. You’re looking at a 1,500 square foot house rather than 2,000, unless you have full egress going out of the property. In Washington, if you have a full egress, you dig down the basement, you put sliders in and you can egress out, they’ll give you 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} value.

Dave:
Like a walkout.

James:
A walkout basement. Yup.

Dave:
What about a DADU?

James:
DADU, they give you 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} value for the square footage in Washington, and then they’ll look at it… They do it two different ways. A lot of times they do it on a rental approach if you’re keeping it in… Well, it depends on the lender that you’re putting together, but they’re going to use it based on either rental approach if you’re keeping it as a rental. But in Washington, we can condo them off and give them their own parcels, and so they’ll give us full straight value. They were extremely difficult to comp two years ago because there wasn’t very many. Now there’s a lot more.
What they used to do is actually take small single family houses on small lots and then town home comps and they would blend them together to get the value prior to having the data points. Now, luckily, we have a lot more data points. It’s easier to put values on them.

Dave:
I was curious, because for everyone listening, DADU stands for detached accessory dwelling unit, basically a little second unit, call it a mother-in-law suite, something like that, that’s not attached to the primary home. In Washington, as I understand, James, they have “upzoned” a lot of the single family plots so that you can add these things. They’re talking about doing the same thing in Colorado right now. I was curious because that seems pretty important for comping if you were going to add those types of things, what kind of value you get for it.

James:
Oh, yeah. Extremely valuable to understand that.

Jamil:
In Arizona, the DADUs are still only getting 50{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of value. Unfortunately, I think and it just has to do with inventory and we’re not as constricted as the Pacific Northwest or places like Los Angeles where that DADU has a major selling point, here in Phoenix, Arizona, they’re still only giving you 50{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of value for them.

James:
Phoenix is a lot bigger city, so the density is not as… Seattle is tight, so they’re all over the density.

Dave:
All right, so are those your rules, Jamil?

Jamil:
These are the appraisal rules. I would highly suggest that anybody who is really planning on becoming a full-time real estate investor, you learn these rules and you commit them to memory. The more you comp, the more you look at properties and try to determine how much stuff is worth, the better you will be at it. Getting good at comping doesn’t just happen naturally. You have to practice at it. I would suggest putting in as many reps as possible so that you get really good at understanding value.
For myself, David, I became the most important person in my company because I am the best comper there. That’s it. I’m the one that they go to to make sure that we’re not making a mistake in the commitment. I’m the one they go to to ask how much is something worth. Because of that, I’m just always going to be the most popular guy.

Dave:
You’re a popular guy for many other reasons beyond that, but that’s a good skill to have.

Jamil:
Thank you.

Dave:
All right, well, Jamil, thank you so much for sharing this. Again, anyone who wants to check out these tips, Jamil has very generously made that available to everyone. You can find those in the show notes or on biggerpockets.com. All right, let’s go to James. From what I understand, we were talking offline, James, you have a slightly different approach, because whereas Jamil is comping things on a national basis and has to be really good at this without intimate market knowledge, Jamil, I assume that that makes sense.

Jamil:
Very broad, yeah.

Dave:
But James, as you always talk about in the show, you really concentrate on one market. How does comping change with your style of investing?

James:
What Jamil is doing and what he just talked about is so important, because I’ve been investing in other deals in other states too with other operators. Having those general principles for a nationwide wholesaling or when you’re doing more tract style homes, that will really help you get through your deals quickly. Having those tools are really important. For us, we have the same general rules, but we’re a metro flipping company and we work inside infill areas, very tight density spaces, which have a lot of concentration of population in a small area. What that means is there’s a lot more variance in a small area.
When you’re looking in Phoenix, Arizona, it’s a bigger short plat. You might go into other subdivisions that are a lot bigger. Whereas in Seattle, we have to say sometimes street by street. When you’re dealing with an expensive market, the as is comparables are irrelevant to us. It’s all about what is the potential of the property and the value add that we can uncover to make this deal more profitable.

Dave:
Can you just say more about that? What is the difference there with as is comps, and what is your approach? Does that just mean you’re not restoring the house in its existing format and you’re thinking more creatively about totally renovating, adding new features, adding new bedrooms, adding new units? Is that what you mean?

James:
Well, it’s more what am I paying for the property? If I’m looking at a property right now and I can pay let’s say 500,000 for it, if I go on the MLS and I find like for like comparables, which maybe the home doesn’t have a finished basement and need some repair, what’s the as is value like? What would that house sell on market in today’s number for the condition that it’s in? When you’re in more tract home areas, the variance is going to be a lot different because the tract homes are typically built a little bit better. They’re newer, like Jamil was talking about. They have the same floor plans. There’s not going to be as a big of a variance on the as is for the remodel.
It’ll be more standardized. But in metro areas where you’re typically finishing more space, adding more living space and adding more value, the swing in the comps are very dramatic. A 2,000 square foot house that’s only half finished could sell for half of what a finished house would at that point. If I’m looking at more broad areas, I’m still always referencing the as is. But if I’m in my core metro, I’m really just looking at what the buildout plan is, what’s my total maximum build-in square footage, and then how do I get there with a systematic construction plan, not just grabbing comps and then putting the house back together.
A lot of the value curated in the comps is based on what you’re going to do to the property and how much heavy lifting you have to do.

Dave:
All right, so tell us how you do it.

James:
In metro areas, when you have a lot of density, there’s not very much inventory a lot of times. And then the other thing about these core metro areas like San Francisco, Seattle, Austin, they’re expensive and there’s a lot of money down there. A lot of times just buying a like for like renovation, when you’re buying a three bedroom, two bathhouse and selling it for a three bedroom, two bath house, the margin is not going to be there because the buy price will just be too high. For us in Seattle, we’re always taking and we’re looking at how do we increase the value. How we do that is the first thing that…
My general rules for comping a property is I need to be on the search for how do I increase this and find that magical formula and plan that’s going to get the highest and best use. We’re always focusing on highest and best use, which is going to turn in that value add. But when we’re looking for these things, the first step we always do is pull the tax record, because the tax record of the property is going to give us the general specs to what we can build out in there. That’s going to give us the finished square footage, the unfinished square footage, what the current bedroom and bathroom counts are, what the buildable out plan could be to where we can add those in.
If I’m looking at a house that’s 1,000 square feet upstairs, two bedroom, one bath and I have 1,000 square feet in the basement, I’m not really worried about the two bedroom, one bath because I have 2,000 square feet that I can work in and I can build whatever I want in there. I can at least probably get a four-bed, three bath with the right construction plan. I always pull the tax record because I want to know what the shell of the property is, what’s my buildable square footage that I can work inside.
And then the next thing I want to do is look at the other core aspects, which are going to be year built, because that’s going to tell me what kind of construction I need to do on that project, how rough it’s going to be, what kind of upgrades I’m going to need to do the duration of time. When we’re comping, we’re also thinking about the value plan that we’re putting in as well. If I have a home built in 1920, I know that that property is going to require a lot more seismic upgrades because the wood is old, the framing was different, which could add three to six months on my plan as well. The core comping is also telling me how to underwrite the deal all the way through.
It’s not just for the value. But as we pull the tax record, the core things I’m looking at is buildable square footage, year built and the era. I’m looking for the style code of house. Is it a daylight basement? Is it a basement house? Is it a two-story? Is it a rambler? And then the other thing that we’re really focusing on is what is the lot size and what is the zoning behind that? Because there’s a lot of hidden value inside your land. That’s where we have done very well flipping is not just looking at like for like remodels and going, “Oh, I can build this here and this is what my margin is.” It’s where is the hidden value.
We spent a lot of time looking at the lot, what the topography of the lot is, and then what is the zoning in that specific city, what do they allow for, whether we can build additional units. Can we subdivide it off? Or maybe the lot is just good in a metro area and it’s a little bit oversized, which in metro, if you have an oversized lot, you’re going to get a huge premium, especially with the pandemic and people wanting to have a staycation. Those things make a big difference while I’m going through my tax record. Always pull the tax record. Then we go right to the street view because I need to know, like what Jamil was talking about, is you can stay in subdivisions on these bigger cities.
With metro cities, street by street can vary dramatically, where I could be one street over and the value could be 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} more and then I could go another street over and that could be an additional 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} more. Those make big, big variances on the street view. I also want to see what my neighbors are. Because during that time, if I’m going to sell a house, but I have maybe crummy neighbors, that’s going to affect my resale in an expensive market by five to 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} sometimes, because people are okay spending the money on a property, but they want to live in it and they want to be able to go. The street view tells me my neighbors.
It tells me what is my street condition. Does it have sidewalks or not? That could be a five to 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} bump just on livability feel. Those are things you have to check out for as you’re comping because that’s going to make a huge difference on how livable it is. The other reason we’re checking for sidewalks is because that tells me utilities are there. That’s going to tell me what I can do with that lot as I’m looking at… If I’m looking for hidden value, but I have no utilities right there, it could be too expensive to bring in that extra unit in the back.
These little things can tell you a lot. Just by going on Google Street, I can see there’s going to be a 10 to 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} value swing just by looking at that. We go tax record, we look at the street, and then we start digging into our comps, which is going, okay, this is what we have, this is what we can build out. And then we pull three sets of comps every time. We’re going to pull on the unfinished space. We’re going to pull comps for the property with just the finished space that we’re not adding the space into the basement. Then we’re going to go highest and best use, which is looking at the total maximum square footage of the property and what can we fit inside there.
And then that’s going to give us the second value. And then the third value we’re looking for is where is the hidden gold on the property. If we have a 5,000 square foot lot with an alley in the back, which the Street View is going to tell me and it’s flat, in Seattle because of density, I can maybe add an additional dwelling unit there, which can dramatically change by numbers.
Every property we look at, we look at three different sets of comps, highest and best use with development, highest and best use with total maximum square footage, and then highest and best use for a simple renovation where you can get in and out of the project, not move as many things around, and click the deal out faster. Because sometimes building out the most expensive best product is the worst plan because of the permitting and the time.

Dave:
Awesome advice. Thank you so much. James is going to share a deal with us, and we’re going to walk through one of the recent ones, but it struck me while you were talking, James, and comparing it to Jamil that these two different approaches to comping make a lot of sense relative to your business model. Jamil, I assume that you hear James’ approach and you’re like, “That’s a great way to do this, but that’s his job because he’s the flipper.”
Whereas you’re the wholesaler and you’re trying to figure out just the basics of how much it could get, because it’s not really practical for you to know what a flipper might want to do in terms of renovating or adding, doing gut rehabs or just doing a cosmetic rehab. Is that right, or is this just personal preference here?

Jamil:
Well, I think we absolutely do do what James is talking about in certain pockets in our business as wholesalers. However, it is a lot fewer of those types of deals where we’re actually chasing a deep value add opportunity. We are more in the volume business of selling like for like. Hey, here’s a 2,000 square foot, three bed, two bath. Here’s a 3,000 square foot three bed, two bath. This is the ugly house. This is the cute house. Cute house is worth 500K. Buy the ugly for 350.

Dave:
Right. But then if the flipper does want to do the deep renovation, then they can. You’ve shown them that there’s value just doing the simple thing. If they choose to do the more deep dive into this like what James is doing, then that’s up to them.

Jamil:
Yeah. Again, it’s pocket specific, city specific. If the neighborhood calls for it, for instance, where I live here in Phoenix, in Arcadia, we have value adds happen all the time. You’re always looking at lot size, exactly what James talked about. In Seattle, you actually can go very close to 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} lot coverage. Here in Phoenix, 42{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} is max. You can only cover 42{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of what a lot size is. We’re still doing this similar thing. The number of instances that we will get that deep into it is 5{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} of the time.

Dave:
All right, cool. Well, James, are you ready to share with us the deal you got?

James:
Yeah. We actually just closed on this. Randomly, when I did my first underwriting, I didn’t like the deal at all, because I flew through it really quick and I was like, well, it’s a lot of work for not that much money.

Dave:
How’d you find the deal, by the way?

James:
How we found the deal was actually a seller, he’s a builder in Washington, and we’ve boughten 18 homes from him over the years because we make it so easy. From an investor standpoint, when you’re doing B2B with other investors, it’s an easier transaction. He understands the math. We have our math. We make it very easy on him. He is a very established investor. But because we’re easy and we can be aggressive and his skillset isn’t doing renovations, so he doesn’t want to do all the value add, so I can do it for a lot cheaper than him. A lot of times he just called me up and we just did another deal.

Dave:
Nice. Awesome. All right. You didn’t like it at first though?

James:
I didn’t like it at first because I went through my surface underwriting really quickly, and the reason being is because the location it was in, it was on a oversized lot. He called me up and he says, “Hey, we have this house. It’s been a rental property of ours for 35 years.” It was a two bedroom, one bath house, 760 square feet on the main floor, and then there was 760 square feet in the basement that was totally unfinished. I’m looking at that property and I’m going, “Okay, well, I have a tight footprint house. Not the best thing for resale.” Those are things I’m always looking at when I’m going through a deal is not just what is the square footage, where is the square footage.
Because if you have a 2,000 square foot house with an unfinished basement that’s 300 square feet, that’s actually going to be a lot more livable than a 2,000 square foot house with 1,000 up and 1,000 down. At first when I looked at this, I’m like, well, I got roughly a 1,580 square foot house, but it’s not going to live really well. It’s going to be tight, two main floors, small bedroom, small bathrooms. That’s not great for marketability. That was the first way I looked at it. I’m like, that’s going to be kind of tight. It was in, I would say, a B style neighborhood of Seattle, not the prime part, but it’s in a path of progress where market values have done well.
But that’s also the markets that compressed a lot over the last six months. I wasn’t itching to be in this exact location because it was a weaker pool. At first I was like, well, I can buy this house. He wanted to just get a number out of me. The first things we did is we looked at the square footage, 740 up, 740 down. I knew what I could work with. And then I also knew that I had a daylight basement house because I had egress out, but then part of the square footage is not going to be above grade. Then what we did is once we looked at those comparables, I pulled two sets of comps.
The first one was for a 740 square foot house with an unfinished basement that was completely renovated, still new roofs, new windows, new plumbing, new wiring, and an establishing value at that point.

Dave:
Did you say 740 square feet?

James:
It’s a tight one, yeah.

Dave:
Oh, okay.

James:
It’s roomy.

Jamil:
I think the right word is cozy.

James:
Cozy, yes. Very cozy.

Dave:
Very cozy.

James:
When we pulled up those comparables, I’m looking at it two ways. I’m going, okay, well, the reason I like looking at it this way is because it’s fast. I can have that house renovated in six months, back to market. I’m selling that. I can put out my money, get it back in six months. It’s a good velocity. The issue I was having was was those comparables were only about $620,000 at the time. I knew he was wanting to be around 500. That is not going to pencil at all for us. Also, that was going to require me to back my numbers down and be at an offer price of around more of 390 to 400 to him, which I did not feel was a good value to the seller.
I knew that wasn’t an option because it wouldn’t work for the seller. So then we went to the next set of comps, which was gutting the house all the way down the studs because the layouts were a little awkward in the property, and we had to take it all the way down the studs and optimize it into a three bedroom, two and a half bath house. We were going to do a formal en suite upstairs with a walk-in bathroom closet, because all the comparables that we were seeing had the bigger bedrooms. Well, let me take a step back. As we pulled the comparables, we were looking at four bedrooms, two and a half bath houses, but ones with formal en suites and then ones without en suites.
The ones with en suites were selling for 10 to 15{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} more than the ones without. For us, as remodelers, we already know we’re going to take the whole thing down the studs anyways, so it doesn’t make a difference and cost that much whether we’re doing that or not. We threw away the non-en suite properties because we’re still doing the same amount of work to get a higher comp.

Dave:
Is that just something you know being in your area that en suite bathrooms is something you should be considering, or out of all the dozens of variables between houses that you can consider, how did you identify that en suites were the difference maker there?

James:
Well, there’s always your major selling features. When we’re looking at comps, we’re going through picture by picture on each house and we’re reading the descriptions. Because if you just do it quickly, a four bed, three bath house won’t comp for the same as a four bed, three bath house. It needs to have those amenities. We’re always checking for kitchens, en suites, because those are two big selling features. And then we’re also checking for layouts of bedrooms and baths. Where is the locational? If you’re a one bedroom upstairs and two in the basement or let’s say three in the basement, that’s a worst resale product.
Families don’t want to have their kids downstairs. We’re checking locations of spaces as well, because those are big differences. Not every 2,000 square foot house is the same. We’re checking all those finite details. Because as we’re doing our construction plan, it makes a big variance in the cost too if we’re having to move all the bedrooms, all the bathrooms. We’re looking for the highest highest and best use at that time.

Dave:
That’s awesome. Where did you come out with the final value there that you could get out of this property?

James:
After we looked at it, by adding the two bedrooms and a bath and a half and creating the en suite, the value of that property was going to be 699, or no, 725 at the time. By doing the extra scope of work, it was increasing the value by over $100,000. The cost of that renovation is only going to cost me about 50,000 more to do that plan. I’m getting 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} upside. But the thing I also have to look at when I’m looking at comps is how much time is that going to be because there’s a cost to that debt.
My true cost may be 50 grand to increase the value at 100,000, but I also had to account for the $20,000 I was going to incur in debt cost and whole cost. That tells us what the highest and best use is with these technical plants. At the end of the day, we’re still getting a 30{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} margin increase by using the debt and the construction to increase the value.

Dave:
Jamil, would you do anything differently?

Jamil:
No, I think that it’s really interesting to hear the really creative ways to increase and add value. One of the harder things for me to have ever fought for with respect to an appraisal is how much layout affects value and what James is talking about with respect to where the bedrooms are located. He’s 100{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} right. Of course, when you’re talking about a family, families don’t want their children to be on a different floor than where the parents are. That’s a very real thing, right?

Dave:
Yeah. I have a buddy who turned out like a beep up and we always make fun of him because he’s the basement kid. All his siblings lived upstairs and they were all fine. His parents stuck him in the basement. It’s been downhill ever since.

Jamil:
I mean, look, I was a basement kid too.

Dave:
Look at you! All right, you proved it wrong.

Jamil:
Well, I mean, if you were looking at me in my 20s, you’d be like, “That guy sure is turning into a basement kid.”

James:
Everyone can get out of the basement at some point.

Dave:
You’re a basement to top floor success story.

Jamil:
It’s interesting, because I agree, there is an intangible value to these nuances, these different things. I’ve just yet to see how that affects homes or how that has affected an appraisal in a deal that I’ve been involved in. I don’t know what is the value for a better layout and how much can you give that property?
What James is doing is he’s looking picture by picture and seeing, okay, well, if you have the en suite, it’s worth 20{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} more. I mean, over here, because we’re so cookie cutter over here, it’s just completely different. I love the artistic, I love the very intricate ways that you can… I would say that the way that James is comping houses is artistic. The way that we comp it is very formulaic.

James:
The one thing you can do as an investor is use your broker as the sounding board, because an appraiser’s not going to consider that as much a lot of times. They’re not going to consider the bed or bath counts as much, or livability and flow. That’s what your broker’s for. They’re going to tell you, is this property more marketable? If it has a better perfected floor plan, typically you’re going to get five, 10{ecd1c82889c5dde6baa4cae2f6d3d4c330bac74c2b880dafaca78809ece33a56} more. That can make a big difference when you’re selling a million dollar house. Use the whole team when you’re looking at comping properties because it can make a huge impact. But this deal got even better though when we dug into it.

Dave:
What?

James:
Oh, it got way better. This is what pushed me over the edge because it was about looking at that highest and best use. Once I’ve figured out I was in his range, we dug down in more. Because when we’re looking at those numbers, we ended up buying this property for 435,000. We’re putting $135,000 in the construction, and then we’re going to sell it for 699 to 725 when we establish our comparables. The margin on that after you turn it and you take nine months and the hard money costs, it actually ends up being like 60, $70,000 in profit, which this is a lot of work for that much money. That’s where I was having the hesitation.
Going back to that, Metro cities, you can take a very average deal that might not be worth the effort and maximize it, because the next thing I looked at was the size of lot. The size of lot was a 6,800 square foot lot, which is big for Seattle. Typically, they’re four to 5,000. It was zoned single family. If you just look at that very surface level, you’re going, “You can’t build anything more there because it’s SF 5000, so one house per 5,000. You’re short.” But with the density increase, they’re allowing you to air condo off cottages. And then in that cottage or the DADU, we can then build a unit in the back, condo it off and sell it as a separate property.
But there’s a couple things you have to watch out for when you’re comping these. When you put a structure in the back of the property, my property that was worth 725 is now going to go down in value. My lot size is shrinking. It’s more congested. We have to adjust that down. The things that you have to consider on those values is where is your parking. Sometimes you are losing parking by doing this. Parking in Seattle can be a difference of $100,000 if you have a parking spot because of the amount of density. And then there’s a little bit more crime right now. You have to adjust that. We’re planning in the DADU.
And then based on that DADU, we had to come up with two new comps. One is how much is that property value coming down. And so then we started looking for comparables with properties with backyard cottages as well. We were only focusing on that, which brought our value down from 725 to 675, because we were still going to have parking and we were still going to have a yard. If we wouldn’t have had a yard or parking, it would’ve actually been 599. Really digging in those core attributes. The next thing we had to do was, what DADU do we build in the back? Do you build a two bedroom, two bath with no garage?
Can you get a one car garage in? Can you get a two car? Because a DADU in the back when we pull comps, if it had no parking, no yard was worth 599. If it had a one car garage in a small yard, it was worth 800.

Dave:
What?

James:
The swings are that big.

Dave:
What?

James:
Same square footages, same designed houses, but the livability factor, because they didn’t feel like they’re in a backyard condo, they feel like they’re in a house.

Dave:
In that single family home.

James:
Then I had to revisit the site and go, what can I fit here? And then from there, we figured out we could get a two car garage on this property, a two bedroom, two and a half bath, 1,000 square DADU with a yard, that’s worth 800 grand. My combined value just went from 725 on the high to over… We’re looking at the DADU’s worth more than the house in the back.

Dave:
I mean, it is a DADU technically, but you’re just building a second house.

James:
But it’s permitted and condoed off as a DADU. That’s important. Because if we were subdividing, it would take six months to nine months longer than doing the DADU. On that cost, that’s $100,000 in hold cost at that point. When we’re pulling comps, it’s not just about finding like for like, that’s important, but it’s the scenario. How are we moving it up and down?
What is that magical, highest, and best equation that might be the most amount of work, or maybe it’s due to the least amount of work and get your velocity of money going? Get in and out, turn it. Because at one point, I was really thinking about just doing a two bed, one bath, turning it because my cash on cash return was actually higher than the bigger project.

Dave:
I love this because a lot of times, especially in recent years when deals have been difficult to come by, we say on BiggerPockets and lots of other real estate educators say that you can’t always find deals, you have to make them. I think this is a perfect example of making a deal. Obviously not everyone can do this type of construction, but it just proves that thinking creatively and finding the best possible use of your property can make something great out of what at first pass appears like it’s not going to be profitable at all.

James:
Yeah, and that’s where the talent of comping is so important. I heard for two years, you can’t find deals. There’s no deals. Our favorite deals and the most amount of properties I buy are ones that are sitting right on market publicly advertised for sale that have been on market for six months. People just were looking at it one way. My passion is looking at a deal that everyone says is a bad deal and cutting it up four to five ways and finding that magical equation to where it goes from a dud to a home run.
That’s why if you’re in those core metro areas, the properties are expensive, the values you can get the upside, but you have to put that perfective plan together, that’s by understanding values and then going, okay, what can I do to maximize this deal, but not overcomplicate the plan?

Dave:
I love it. That’s a perfect way to get out of here. Thank you both so much. I’m going to try and flip a house hopefully with you guys. Let’s do it together. I think it would be super fun. We’ll make some content out of it, but I learned a lot. One quick question for you guys. I know we have two seconds. Can you tell me really quickly, how do you adjust this if you’re in a market that’s correcting? Are you taking these comps and then adjusting them down in the comping process, or are you padding your construction budget or your margins? How do you adjust to make sure that you’re not comping against a market that will have changed in six to nine months?

Jamil:
For me, if I’m using comps that are 90 days old or newer, I feel pretty confident that we’ve adjusted for market condition. Yes. Here’s other thought. I’m seeing the market actually improve, so I don’t feel like we’re going to be worth less by the time I come to market on my renovation from this point as long as I’m using comps that are 90 days older or new. And then I’m also looking at pendings, where are actives and pendings sitting, because that’s going to tell me the direction of where things are going as well.

James:
Yeah, Jamil nailed it. Recent comps or we use comps with similar interest rates. We’re going, okay, what is the rate at? Let’s look at what the market was doing at that time. And then pendings. Pendings are key because that is the most up to date. And then communicating and talking to those brokers because they’re also telling you how many bodies are coming through that house. If they’re pending at full price, but they had six people come through in the weekend, I’m going to feel good that that market’s going to hold. If they were on for 45 days and they had one offer with very little showings, I might bring the value down a little bit. It’s about velocity of people as well.

Dave:
All right. Well, we got to get out of here. But thank you guys so much. This was a lot of fun. We went way over because I was learning a lot, and I hope everyone listening learned a lot. Thank you, Jamil and James, and thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Caitlin Bennett. Produced by Caitlin Bennett. Editing by Joel Esparza and OnyxMedia. Researched by Pooja Jindal and a big thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.