When people look for comparable assets (“comps”) the sole focal point is often price. Price-price-price. People look for comparable sales data that proves or supports the value of a similar property. As a seller of real estate this makes perfect sense as you about to exit the transaction. As a buyer the price-price-price perspective is very short-sighted.
Finding comps begins with a review of comparable assets in the same submarket as the asset under consideration. It is imperative to not stray from the submarket in question as this is where the subject asset is competing for customers.
It is important that someone from your team (or you) go see, in person, on foot, these comparable assets. NO driving by. NO pulling down photos from the web. Go see, go touch the competition. You’ve come this far, after all. If your acquisition candidate has all new stainless steel appliances and the competitors believe “avocado green” is still in fashion… there’s only one way to find out- go see.
Comparable properties must be within the same “market”. What is a market? Market studies often have nice and neat one, three and five mile rings around a star that depicts the subject property. For housing, the “real” market area, the area from which the property draws customers is seldom a 360 degree sphere. There are always some form of natural barriers that define the shape as something other than round. These barriers are defined by various aspects; there can be physical barriers (a freeway), cultural constructs (local art scene), and financial (price or income).
The market is further defined by a polygon that includes the subject property and directly competitive properties. A polygon is nothing more than a boundary. What makes polygon’s interesting is building them accurately to “fit” the market area for a specific property.
With a review of comparative assets we are really looking to confirm or deny if properties within close proximity to the subject asset are in fact comparable. Once we have identified those that are comparable then we can review asking and actual rents on an apples-to-apples basis. If the follow aspects are within the market for the subject asset and are similar in many respects to the following list, then it is likely an acceptable comparable property.
When we have determined which “apples” are comparable to our “apple” we can further deduce if rents are really comparable, or comparable in market for the product we are looking to purchase. There is no better way to do this than by walking onto the grounds of comparable assets.
Following are items to review that allow you to determine if a property in the same market is a comparable asset.
Address. A must have, of course, for the subject property and all comparable assets. An address allows you to define proximity to similar services like shopping and medical. An address also provides insight into whether or not the comparable assets are pulling from the same rental pool. You gain all of this from knowing where and how far apart the properties are from each other.
Age of asset. Age matters. There are just certain expectations that come along with date of construction. I’m referring to functional use rather than architecture. For example, multifamily housing stock built prior to 1978 is known to have lead paint, right? Well, all paint contained lead prior to 1978 so that is no news. Consider that apartment construction through much of the 1970’s built units with only one bathroom.
Appliances. The age and condition of appliances is a factor in rentals. How does the subject asset compare to comparative properties? If your asset (with that great avocado green motif) is up against stainless steel then the battle is lost without immediate upgrades. Doesn’t mean you must have the steel, but the avocado has to go immediately! Sometimes this is done all at once, other times as a scheduled upgrade occurring at turnover or by building.
Functional use. Murphy beds (pull down beds) are great in tight spaces they are generally a dated technology considering we now have futons and roll-a-ways. And while pumping the well for water is a vast improvement over having to go to the river, running in-door water is just a tad more convenient. You understand my point; old is old. A pull-chain water tank in the bathroom can be “retro” but, really? This is just a further admonition to make sure you are comparing apples to apples.
Common area amenities (pool, clubhouse, fitness center, landscaping). A review of common area amenities begins with a yes/no for things we see like those noted; is there a pool? Is there a fitness center? The next stage requires a narrative on your part based on a closer look. For example, some properties may have a “club house” that is nothing more than a leasing office whereas others will have work out facilities, a movie theater and small grocery. As for pools, one property may have a nice “puddle” while a neighboring property has forty sun deck chairs and an open bar.
Rent per square foot. Where $900 a month may rent a two-bed at all locations, the costs, or rent per square foot may be significantly different. Of course, a big part of costs differentiation will be identified using this list to compare amenities, condition, location etc.
Cost per foot. Because our definition of a comparable assets is distinct from those found in an appraisal, consider identifying recent sales prices for competitive assets. This is sometimes easy, sometimes hard but worth collecting if possible to add to your database of knowledge about assets you will compete against in the marketplace.
Reputation and Recognition. Every property has a reputation. This is sometimes difficult to ascertain in a compressed amount of time, but try. Do not rely exclusively on internet sources, but as a general rule of thumb properties with ratings below fifty percent have some real issues. Is the property “recognizable”? Is it a local landmark? Does this status attract or detract potential customers (tenants).
Presentation. Presentation is all about first impressions. What is your first impression for each asset reviewed including the subject property? Write it down. Then, um, compare them…
Car counts. Do all the assets have street frontage? Whereas its nice to be on a “quiet street” people looking for a place to live have often driven by the place “a thousand times”. What is the car count for each asset? This information may be readily available from city offices or the planning and zoning department.
Proximity to jobs, schools, shopping and medical. Recognize two assets can be the same distance from job centers, schools, etc, and yet have completely different commute times. Don’t let the map fool you. I’ve been in Boston where can see my hotel, yet at rush hour it’s still 45 minutes from the airport. I’ve been in Atlanta on “Peach Tree” and had five minute waits to make a left hand turn. I’m sure you can relate your own stories. Check out the commute times to the closest job centers…
Number of bathrooms per unit. There is a BIG difference in the livable space depending on the number of bathrooms and perceived value. Do not under-estimate the importance of knowing the number of bathrooms per unit in competitive assets.
Similar unit size and layout. We’ve all seen a bad layout. In fact, you know it when you see it. When the front door practically opens into the kitchen, windows facing walls, sharp turns, doors without spacing. There’s nothing like walking into a “space” to get a feel for the “place”.
Ceiling height. Institutional quality assets will have nine foot ceilings. Does the subject asset and all comparable’s have the same interior ceiling height?
WI-FI. Yes or no. Legal or illegal? Do any of the asset provide WI-FI as part of the lease package? For the subject asset, the one you may purchase, is WI-FI provided legally or illegally? This is a big deal if in fact 198 tenants have WI-FI included in their lease and the seller is providing this through a” hot-wired” connection paying for only a single connect. Once discovered and disconnected, the new owner is still on the hook to provide that service to the tenant base- no doubt at a price-point that reflects the number of connects.
Code violations. Check public records to see if there is a consistent pattern here. Everyone is susceptible to being “written up” by the city for this or that. The thing to review is the nature of the violations and if they are on-going and consistently occurring. Why have this as part of an asset comparison? Because if one asset has fifty versus another asset that has, say, two… it speaks to management’s ability to address such matters and put them to bed. Granted, sometimes owners are out of cash and the violation is re-occurring. Sometimes a particular property, for whatever reason, seems to be a favorite target. You can’t know everything, but you can review the number and nature of the violations and draw some general conclusions.
Parking. Do all assets offer the same type of parking? We have; covered, uncovered, garages, assigned. Some properties can charge for parking, some cannot.
On-site management . Yes or no. Having on-site manager is a plus for ownership and tenants. People like the idea of seeing management face-to-face during regular business hours. If three properties have on-site management and one does not- the one that does not is “less comparable” than the others.
Security. Security has several aspects; one type of security is abundant lighting; common area lighting. This is lighting that will get people from their vehicle, or property entry point, to their unit without shadows. The next level of up from here includes cameras, then on-site personnel.
Incidents of crime. Separate from provided security features; is there recorded incidents of crime on property? If yes, are they mainly against people or property? Is the crime violent? Do the events seem random or consistent?
And how does that make you feel? This process requires you to be objectively and subjectively clinical. You can do all the numbers. You can check all the boxes, but what does your gut tell you? Do parking lots compare in terms of cleanliness? Is every door painted at one property and none at another? Is car traffic “great” but come with constant street noise? The narrative here tells the story.
It’s your money at stake. For the property that is a potential purchase many items mentioned here can be addressed to make the asset more competitive. Some items, while known, cannot be changed and will remain a sticking point or continued differentiation to overcome. Do not short-circuit the process.
The first order of business is to not fool yourself; giving weight to a potential purchase because “you can taste it” is a trap difficult to avoid sometimes . Get real. Any investment in real property is a long-term commitment. Only consider marrying those that have great potential for a long-lasting, long-term relationship.
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.
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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. http://www.MultifamilyInsight.com