Talking Comps Analysis / The SE Condo Index

Posted by urbandigs

Wed Jan 25th, 2012 09:04 AM

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A: I find myself getting into more and more talks about comps analysis lately and just wanted to put some thoughts into an article. My main point will continue to be: perform a comparable market analysis using the least amount of adjustable variables as possible! The more variables that you introduce that require adjustments, the more you will degrade the ultimate analysis. The simple solution to this is to stay in building, but the ideal solution is to stay within the same line of the target apartment. However, in the real world, data is not always available and exceptions must be made. Lets discuss. (originally published October 28th, 2011)

One fallacy that just rubs me the wrong way is when brokers start to justify higher property expectations using sold comps from a different building when there are perfectly good comps to use in the same building. The reasoning for this is usually always the same, "the in-building comps are too old, I never use a comp that is older than 3-5 months old". To that I say Hogwash! Let me explain.

#1 - First off, when trying to find out where the market is today relative to a closed deal do NOT go by the sale date of the comparable sale! Rather you should focus on when the sold comparable was SIGNED INTO CONTRACT to see how the market has changed since! Sure the deal may have closed 90 days ago, but for all you know the deal was signed into contract 7 months ago and had a delayed closing!

Here is an example:

-- Unit is signed into contract April 2011
-- Unit closes August 2011 after a delayed co-op board review and closing

Market conditions at the time of contract execution is what matters most; not the market conditions when the deal ultimately closes.

#2 - By leaving the building and using an outside building's sold comparable for an analysis, you are introducing the following variables that are impossible to quantify:

a) building service level
b) building financials
c) banks willingness to lend to building based on bldg's unique characteristics
d) building amenities
e) building policies & restrictions
f) building type (yes, I had brokers compare an ACTV co-op to a SOLD condo to argue for a higher bid from my client)
g) school zone

etc..How any one buyer values changes in Building features noted above is highly subjective! So, do yourself a favor and focus on sales in the same building as the target unit where these variables are constant!

#3 - By leaving the building and using a different unit altogether, you are introducing the following variables:

a) different layout
b) different size
c) different carrying costs
d) different exposure / views
e) different levels of natural sunlight

etc..

Think of the "Im using a recent sale in another building" argument now? Rather than keep all those variables constant by staying in-building and adjusting for a) floor, b) time, and c) renovations, you would have to adjust for 11-12 additional variables that quite frankly nobody has any means to quantify anyway? In Manhattan, every building is its own little unique marketplace.

Do not degrade a comps analysis and make more work for yourself simply because a highly relevant sale is 'deemed' too old to look at.

In today's world, we have different companies spending vast amounts of money to sanitize data and build all sorts of applications so that brokers & consumers have incredibly useful tools to help service their clients. We at UrbanDigs like to consider ourselves one of these technology companies, Streeteasy is the father and started it all, RentJuice is making ground in the landlord management business, Buyfolio built an amazing broker streamlining tool, and NabeWise is full of interesting neighborhood information. But the tool I am referring to for this discussion is Streeteasy's Repeat Sales Condo Index for Manhattan.

By only using repeat unit sales and a bunch of 'magic dust', as SE calls it, we have a tool that allows us to track Manhattan price action fairly accurately - by far, its the best tool out there for doing time adjustments on any comparable market analysis. To me, the index fits very nicely into how this market has behaved in the years up to peak, and in the years after peak. Sure there are outliers and individual sales that buck the trend, but in general, its a trustworthy tool to get a good idea of how today's market compares to a point in time in the recent past.

Here is how I do time adjustments when putting together a Comps Report for a client:

--TARGET UNIT 17A ASKING $1,500,000
--SAME LINE COMP UNIT 20A (3 floors higher and in similar condition) SOLD FOR $1,375,000 & DEAL SIGNED ON OCT-2009
*Many brokers would ignore this in building same-line, same layout, same views, same renovated comparable sale simply because its 2 years old - I would argue against that because its very likely the closest match to the target unit!

Then I go to SE's Condo Index and compare today's # with where the index was when the comparable unit was signed into contract on OCT-2009 (story from August 2011 so #s are from that time):



Then its just some simple math as I point out on the above image:

STEP 1: Subtract 1,855 - 1,760 = 95
STEP 2: Divide 95 / 1,760 = 0.0539
STEP 3: Convert 0.0539 into percentage 5.4%

This is not trigonometry! Its simple math that any broker can do. So according to the SE Repeat Condo Index, the market today is roughly 5.4% higher than it was back in late 2009 - and that kind of jives with most brokers' experience in the field over the last two years or so as we saw a progressive reflation from early 2009 lows.

Simply apply the 5.4% to the comparable sales price you are analyzing: $1,375,000 * 0.054 and you come with a positive time adjustment of $74,250 - added together equals $1,449,250. That leaves you with 1 last adjustment for being two floors higher. Two floors is likely not a drastic difference in light/view so lets say $15,000 per floor, or a floor adjustment of $30,000 and you got your fair market price opinion done!

$1,449,250 - $30,000 (floor adjustment) = $1,419,250

I would expect bids to come in around the $1.42m range for this target apartment that is on the market asking $1,500,000 and I didnt have to worry about adjusting for a different building, a different layout, a different apartment size, different views/sunlight, different carrying costs, different bldg amenities, etc! Its a clean analysis using the most recent bid for the closest match to the target property that we have data for; without exposing the analysis to variables that otherwise would degrade the analysis!

CONCLUSIONS: Just because a past sold comparable is more than 6 months old doesn't make it useless! In fact, its significantly more useful than switching apartment lines or worse, switching buildings to justify a deal price. If you have to use a different line in the same building, fine, but then the job is to find relevant apartment types to compare; i.e., 2BR/2BTH vs other 2BR/2BTH sales in the bldg in different lines. We have tools at our disposal today to help us do these reports and to adjust for time, that we did not have years ago; so I urge you to USE THEM!! Like anything new, it will take some time to get comfortable with a new method over what you are used to but in the end I strongly believe the service you provide will benefit. Only go outside the building when there is no data to analyze, as these types of analysis (townhouses, walkups, etc) are the most challenging ones to produce.

Cheers!