Differentiating Comps and Listings

Being a commercial real estate investor means being smart, and using all of the information available to you. One of the most important pieces of information available to you is the Comp, or Comparable Sale. While a listing is the desired price for a property, the actual sold price is the true market value of the parcel of land and the building. As Publius Syrius said in the 2nd century BC, the value of a thing is what the purchaser will pay for it.

When you're assessing a property listing, take note of the usuals – the neighborhood, the total equity accumulated, as well as the traffic and business flow patterns. Then, take a look around for similar properties – same total square footage, similar business sectors, and see what they actually sold for. You'll have to do some legwork on this. The first place to start is the public title trust, which shows transaction amounts for nearly every commercial and residential property in the county. Be aware that a lot of these comp listings may be altered by off the book transactions, such as debt cancellation, or a sale and leaseback arrangement.

Ideally, you want to find at least four properties (and six are better) that are broadly comparable to the listing you're looking at. Look at the sales terms, look at the sales conditions, and try to assess what influences drove the price up or down (location, local job growth patterns, differences in construction). Three things that may not be obvious – are checking the timeline of the sale (how quickly it was put to market, and how quickly it sold); checking the proximity to see how close your comparison properties are to each other and how close they are to the property you're assessing. (Using a map and highlighters can really help with this and help your brain spot patterns. Draw in traffic flow patterns and mark congested roads as well. Those are good indicators of depressed prices for residential properties and increased prices for commercial properties.)

Lastly, you want to make sure that the property you're comparing to the listing is as similar as is possible, and that for dissimilar items, you're correcting appropriately. If you're buying 10-acre plots, it doesn't do you any good to look at quarter acre starter home lots, for instance. You'll want 5-20 acre areas to assess. If you're looking at a property with a swimming pool, make sure that other properties have swimming pools as well, or adjust for the value the swimming pool would add to the sales price.

Try to break down the sale price by improvements, location, land area and debt market; being aware of how these variables correlate with each other can give you a heads up on finding properties that are undervalued in their listings, or overvalued, but with negotiation room.

Above all else, remember that this is a business. Businesses aren't about love; they're about making a profit. You should love the house you live in, the neighborhood your children go to school in. You should be a cold hearted, steely-eyed pragmatist about your real estate investments. Comps are a handrail to allow you to step back from the sales pitch on a listing and ask yourself "Is this what I'm willing to pay?"

Finally, be on the lookout for brokers that "dress up" their listings as a comp –formatting a listing for a property you aren't interested in as a comparable sale to artificially inflate the value of the one you are looking at. It's borderline fraudulent, but easy to catch – you should always ask for a date of sale, and the county sales transaction record whenever someone offers you a comp for comparison purposes.

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