If you are a real estate investor, an agent or broker, a real estate appraiser, or a home inspector, you must have come across the term real estate market analysis. If not, you definitely will stumble across it – knowing how to analyze a real estate market is at the core of the real estate industry. But what is this analysis? And how is it done? Keep reading to find out.
What Is a Real Estate Market Analysis?
Real estate market analysis, also known as comparative market analysis, or CMA for short, is comprised of determining the current market value of a property that you are thinking of buying or selling based on the sale prices of comparable houses in the same market. These homes similar to yours are called real estate comparables, or real estate comps – another term that you must familiarize yourself with.
As a beginner real estate investor, you should know that the estimated value of the homes for sale which you analyze in this way is different from the actual appraised value which is calculated by a licensed real estate appraiser. Moreover, it has no legal standing and can’t be used for applying for a mortgage. However, if done correctly, real estate market analysis will give you a very good estimate of the fair market value of the property under consideration. Whether you are buying or selling real estate, knowing the current market value is crucially important.
Now that we’ve established what a CMA is, it’s time to look at how to do a real estate market analysis. Just follow the 7 simple steps below, and you will soon be an expert real estate market analyzer:
1. Conduct a Detailed Property Analysis
The first step in the process of performing a comparative market analysis is the property analysis. You have to analyze and take note of all quantitative and qualitative features and characteristics of the house you are considering buying or selling. These include:
- Housing market and neighborhood
- Distance to major roads
- Access to public transportation, shopping, marketplaces, schools, hospitals, parks, and others
- Walkability and safety
- Property type: single family home, townhouse, condo, apartment, multi family home, or other
- Property size: square footage
- Property age
- Number of floors
- Number of bedrooms
- Number of bathrooms
- Other rooms
- Amenities including a fireplace, verandas, balconies, a swimming pool, a garden, and others
- Lot size
- Parking spaces
- Recent major maintenance works and/or improvements
Remember to write down all these property details as they will constitute the basis of your real estate market analysis.
2. Find Recently Sold Real Estate Comps
The next step in the process is to identify 3-5 houses that are very similar to your investment property which were sold within the past 3 months. Put the necessary efforts into ensuring that these homes are as comparable to yours as possible in terms of size, number of bedrooms and bathrooms, construction age, and all other characteristics. The more similar the comps, the more accurate the CMA. If needed, you can extend the sale period to 6 months. Moreover, focus on houses that are located in the same real estate market and the same neighborhood: no further than 3 miles from your property. Figure out the sale prices – not the listing prices – of your comps.
3. Discover Current Listings of Comparables
Next, you should find out 3-5 similar homes for sale currently listed in the local housing market. Once again, they should be located within a 3-mile radius from your investment property. Write down the listing prices of these properties. You should keep in mind that the initial real estate prices for which houses get listed tend to be inflated as property sellers hope to be able to sell their house for more than their current market value. However, despite this shortcoming, it’s important to have a look at the current listing prices in addition to recent sale prices because some important changes might have happened in the local housing market, pushing home values either up or down in the last couple of months.
4. Locate Pending Listings
When doing real estate market analysis, you should also search for a few pending listings of properties similar to yours. These are real estate deals that have been finalized but have not been fully closed yet. The pending listings will let you get a better understanding of the current state of the housing market and whether real estate values are going up or down. Pay attention to whether these properties are selling for more or less than the listing price.
5. Identify Expired Listings
The next step in conducting a real estate market analysis, or CMA, is to find a couple of recently expired listings of properties comparable to yours. While this might seem odd as these deals did not actually go through, expired listings are very important as they clearly show you what price is too much to ask for if you are selling your house or too much to pay if you are buying a rental property. The most common reason why houses for sale fail to attract buyers is inflated prices.
6. Set Up the Price Range
Now that you’ve concluded the real estate data collection phase, what’s the next step in how to do a real estate market analysis? You should establish a price range. How do you do that?
First, go back to the real estate comps which have been recently sold and find one house which is better than yours for sure. Maybe it’s a little bit bigger, or it has an extra bathroom, or it was built a few years later. The sale price of this home is your ceiling price, meaning that the current market value of your property is definitely below this.
Second, you should choose a comp which is worse than yours. The bedrooms might be a bit smaller, it might be missing a fireplace, or the swimming pool might not be as fancy. The purchase price of this property is the floor price. Your home for sale is definitely worth more than this.
Third, the price range is bounded by the ceiling price and the floor price. The fair market value of your property must lie within this range.
7. Determine the Current Market Value of Your Property
Once you’ve completed all the above-mentioned steps of the real estate market analysis process, it’s time to have another look at all the real estate comps and data you’ve gathered. Compare your property to the comparables from all categories.
Is it bigger or smaller than the other houses? Is it newer or older? Is it more luxurious or less? Does it have more rooms or fewer? Is it in a better location or worse?
After you’ve done this, you should be able to decide where exactly in the price range the value of your property belongs.
Congratulations! You’ve just learned the 7 steps to conducting real estate market analysis.
However, now that you know how to do a real estate market analysis, another important question might have popped into your head: Where do you get all the necessary real estate data for this analysis?
There are many different ways to obtain the needed data and information, but the most straightforward and efficient one is through Mashvisor. After all, real estate investing will be all about making smart investment decisions quickly and efficiently, with the help of the best real estate investment tools.
What Data Can You Get from Mashvisor?
- Investment Property Analysis: Our investment property calculator will help you find out all the characteristics and details you need for the property whose market value you are trying to establish. Below you can see a screenshot of a rental property for sale in the Los Angeles real estate market:
Mashvisor’s Investment Property Tool: Property Characteristics
- Real Estate Comps: Our real estate market analysis tools will also provide you with readily available comparable properties in the neighborhood. Have a look at the comps for an investment property for sale in the Atlanta real estate market:
Mashvisor’s Investment Property Calculator: Real Estate Comps
If you are new to the world of real estate investments, learning how to do a real estate market analysis might sound terrifying. However, it is an indispensable part of buying an investment property to ensure maximum return on investment in terms of cap rate and cash on cash return. As long as you have the best software tools at your disposal, it is absolutely doable.
To get the extra help that you need in order to starting investing in real estate, sign up for Mashvisor today!