Why does the agent leave the lower priced comps out of the CMA?

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Services for Real Estate Pros with Hard money lending for investors in NH and MA

When a real estate investor buys a distressed property with the intention of rehabbing and reselling to an end buyer, those investors are frequently not agents, but they often work with agents to purchase the property.  They also get CMA's from those agents to evaluate the end value of the property after rehab.  The end value is the beginning point of evaluating the rehab budget and how much they can afford to pay for the property. 

Their offers are not usually based on the list price, they are, and should be, based on the end price, working backwards toward the offer price.  Starting from the end price, they will work backwards taking into account the cost of

  • Rehab budget w permits
  • Contingency for unknowns
  • Finance costs
  • Two sets of closing costs
  • Carrying costs including taxes, insurance, utilities, HOA dues, grass cutting, snow plowing, trash removal, etc
  • Let's not forget entrepreneur's profit

If they call me for funding, the first thing I look at is end value, called the ARV, or after repaired value.  Often the investor supplies me with the CMA provided by their real estate agent.  This CMA is done for the purpose of estimating ARV.  I look at sold comps in the immediate area of the property in question, in the same size range and hopefully the same style/age.  In New England, there is frequently a huge variety of properties in the same area, so exact comps are admittedly difficult.

But time after time, I find that the agent totally ignored properties close to the subject property that are viable comps.    Included in the CMA are properties that support the end price they want to convey, but may be in a completely different part of town.  They may be larger, have more bedrooms, have more bathrooms, have more garages.  That's ok if the agent adjusts for those additional features.  But skipping over the houses that sold for much less than the target price is not presenting an accurate picture of the neighborhood.  Perhaps they are in dated condition, perhaps they are bank owned or short sales.  But they can't be ignored if they are truly comparable in location, size and relative condition.   

What's really distressing is when a very close comp in size, amenities, condition and location is not included in a CMA because it doesn't support the after-repaired price the agent wants to present.   The agent considers it to be an anomaly, and so leaves it out.  The investor-buyer relies on that CMA to work backwards toward the offer. 

What happens as a result? 

  • The agent gets their commission on the original purchase.  The borrower then tries to get funding for the deal, and the hard money lender looking at the deal values the ARV much lower than the borrower does.  He won't lend on the property, and the borrower loses his deposit. 
  • Or, alternatively, the borrower closes with his own or private money, rehabs the property, and then it doesn't sell because his selling price is too high. 
  • Or let's say he does a beautiful job on the rehab, gets it under contract to an end buyer, but the end buyer can't get financing because it won't appraise for the selling price.  I guarantee the appraiser saw those lower comps, and appraisers are very conservative these days.

In any case, the investor/buyer is in trouble.  This seems pretty short sighted to me, because that investor won't be back to buy another one. 

I lend to real estate investors exclusively, we don't lend to homeowners, so the focus of my business is pretty narrow.  But those investors resell to homeowners, so the end after repaired value is a critical component.  I always pull my own comps when I evaluate a property.  And I encourage my borrowers to ask their agent to pull ALL sold properties in a small radius in the same square footage range within the past 3-4 months.  The borrower can then go through and see all sold properties and get a good perspective on the neighborhood.

A real estate investor is reponsible for creating a finished product with the end value that will sell.  It's his money on the line.  The agent doesn't have their own capital at risk, so the final value he/she comes up should always be subject to the investor's analysis and judgement.

I suspect there will be considerable disagreement with this post here on AR.  Please jump in with your opinions, yay or nay.

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Rainmaker
758,890
Carol Zingone
Berkshire Hathaway Home Services Florida Network Realty - Jacksonville Beach, FL
Global Realtor Based in Jax Beach, FL

It is amazing how some agents prefer to use only what they consider "valid" comps - I use all the comps in the area, that require less than 10% adjustment to gross value -

Mar 27, 2011 08:00 AM #1
Rainmaker
1,014,252
Gary L. Waters, Broker Owner Waters Realty of Brevard, LLC
Waters Realty of Brevard, LLC - Melbourne, FL
Personal Service, always.

It is like I tell all sellers - you are still competing with distressed properties! Valid comps are valid comps and leaving out certain properties without a valid reason is deceitful - intentional or not! If an agent wants repeat business from an investor or any customer they need to be on the ball.

Mar 27, 2011 08:07 AM #2
Rainmaker
207,348
Tom Waite
Thomas Waite Real Estate Broker - Cypress, CA
So Cal-Apartment Bldg Investments

Amy:

This is an EXCELLENT educational blog for agents who are making CMAs for their investors.  When one makes a CMA to purchase a "beater" home, the comps should reflect it's current condition and FMV...

When making a CMA for the investor's "PROFIT" the CMA should reflect the FMV after the repairs and upgrades have been made ...don't forget the EXTRA value of not having to deal with a bank REO or Short Sale department. There is VALUE in this.

B of A complains that agents "liquidate" price for the B of A hassle...but one must the BIGS are a pain in the Tush!

Tom

Mar 28, 2011 09:46 AM #3
Rainer
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Ross Therrien
Prudential Verani Realty, Londonderry,New Hampshire - Londonderry, NH
Realtor, Broker Associate

When working with an investor who's a flipper.... pricing is especially key due to the short term investment they're makingl.  Closely watching pending sales is important in watching market trends.

Mar 28, 2011 09:35 PM #4
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Rainer
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Ann Bellamy

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