When an apartment investor is evaluating a potential acquisition, the properties selected for comparison to the subject are critical to developing a proper understanding of the actual position of the acquisition target. Choosing improper comps can obviously lead to an inaccurate perception of both the subject property as well as the market as a whole. For the purpose of this discussion, we will be focusing upon existing rental comps and not on comparable recent sales.
In the majority of instances, larger rental assets will be marketed by one of the national or regional real estate brokerage firms. We all know who they are, so no need to list them.
In the offering memo prepared, in almost all cases, a detail of rental comps is provided. As it is a primary fiduciary duty of a real estate agent to maximize the sales price of any marketed asset, it makes sense that a smart broker will select comps that display their property in the most positive light. In some cases, the broker chosen comps are, in fact, the best true representatives. However, in most instances, I have found that they are not.
Obviously, location is a significant factor, with properties geographically proximate to the subject being important. However, simply choosing the five or six nearest properties can lead to a distorted assessment of the acquisition target.
The critical feature that all comps must have is that they must be a realistic consumer alternative to the subject property. In other words, you must view the comps through the eyes of a potential future renter.
Of course, location is going to be a paramount consideration. In most instances, potential renters identify their preferred location, and then go about winnowing down the alternatives to a handful of properties that they may actually research further and/or visit. It is this “handful” of properties that will be most useful to an investor for comparative purposes during the due diligence period.
Of the remaining factors a potential future renter will consider, price is arguably the most critical factor, even surpassing location. After all, if a potential renter identifies a preferred location, but cannot find any options that fit within their budget, they will likely begin investigating secondary location options. While verifying current asking rents for these comps, it is vital that any current concessions or discounts be considered. Further, the inclusion/exclusion of other items like utilities, in-unit laundry and parking must be factored in.
Other elements that should be considered when selecting the proper comps include; property age/condition, building type (garden style, mid-rise, high-rise, etc.), included amenities, parking (on-street, surface or enclosed), current tenant base (young professional, family oriented, senior housing, etc.) as well as those factors that may be unique to the specific municipality or neighborhood.
Using the above guidelines should prove helpful in assembling the preferred comp set, and will provide the most accurate insight into the current competitive environment.
In a follow-up article, we will discuss the best methodology to use to determine how the subject property is positioned relative to the properly chosen comps. It will also include a basis for why rent/square foot calculations can be very misleading, and the proper way to avoid this potential pitfall.