Posted on June 08, 2010 by Torrey Brothers

As a real estate investor you must buy properties at the right price.  This will make or break you in this business.  Buying as little as two houses at the wrong price has taken many real estate investors out of the business and into bankruptcy.  You must be able to estimate the value of a property.  So on this post, I will show you how to estimate the fair market value  (FMV) using the recent home comparable sales method.

The recent home comparable sales method uses comparables or comps.  Comps are properties similar to the subject property as far as size (sq. ft.), bedrooms, baths, age, and lot size.  In addition to this, comps should be homes that have sold within the last 3 months, no more then 2 miles or less from subject property, and preferably MLS comps (comps from a Realtor or agent that come from the MLS).

To find comps, I suggest that you have a real estate agent on your team that can supply you with some recent ones.  But if you are unable to get some comps from an agent, there are a number of other resources available.  Here are a few of them:

• Zillow
• Trulia
• Cyberhomes
• RealQuest (paid service)

With these comps, you can begin to get the FMV of the property.  Begin with the comps closest to the subject property then work your way outwards but no more then 2 miles from subject.  I like to stay in less then a mile from the subject property to get a more accurate value.  Determine the cost per square foot for each comp.  This is determined by dividing the sale price by the total square footage (sqft) of the property.  Below is an example of how to determine the cost per square foot for a home that’s 1,048 sqft and sold for $74,500.

$74,500 / 1,048 sqft.  =$71/sqft.

Based on the calculations above, this home sold for $71 per square foot.  To check your math, if you multiply the $71/sqft times the total square footage of 1,048, this equals the sale price of approximately $74,500.  You want to find a minimum of 5 comps, but if you are only able to come up with a few, then you will have to use them.  After you’ve found the cost per square foot for each comp, you want to discard the highest and lowest values if you have five comps or more.  If you have less then 5 comps, just simply use what you have without discarding any.

Now you must determine the average for all the comps you’ve accumulated.  Add all of the cost per square foot up for each comp and divide by the number of total comps you have.  This will give you an average cost per square foot for the subject property.  Take the square feet of the subject property and multiply it by the average square footage that you came up with in your calculations.  Below is an example.

Subject Property is 1,097 total sqft.

Comp 1: $65/sqft

Comp 2: $69sqft

Comp 3: $71/sqft

Comp 4: $55/sqft

Comp 5: $30/sqft

Discard of properties #5 and #3 (The highest and lowest cost/sqft.)

Add the remaining 3 averages and divide the sum by 3, ($65 + $69 + $55 = $189) ($189/3= $63)

Multiply by the total square feet of subject property: 1,097 x $63 = $69,111
The FMV of the subject property is $69,111

The fair market value of $69,111 isn’t necessarily the value of the home.  If the property needs repairs, this must be taken into consideration.  But the FMV does give you a value for the home if it is in great condition.