If you are a real estate investor, you’ve probably heard of the term real estate market analysis.
But what does this mean? Real estate market analysis, or comparative market analysis (CMA), is a property valuation tool- it is the process of finding a fair market value for a home. In truth, it is more subjective than an official property appraisal, and it shouldn’t be used as a substitute. However, there are many reasons to conduct a CMA.
Why Conduct a Real Estate Market Analysis?
For sellers, you will want to price your property fairly to avoid it sitting on the market for a long period of time. Having your property on the market can be expensive, and you don’t want to cost yourself time and money.
As a buyer, you’ll want to make sure you are getting a fair deal. No one wants to pay more than what something is worth.
Real estate investors have a compelling reason to conduct this step of an investment property analysis. Making sure that you get a rental property for the right price is an important step in securing a good return on investment.
In addition, when buying investment property, it would be time-consuming and costly to get an appraisal for each property you consider. As an alternative, you can use real estate market analysis to determine a fair price to pay. The good news? It is not as complicated as it sounds. In fact, you can conduct a comparative market analysis in a few easy steps.
If you are wondering how to do a real estate market analysis, you are in the right place. We are going to break it down into three easy-to-follow steps.
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#1- Analyze the Property
The first step in a real estate market analysis is analyzing the property’s characteristics.
Before you can analyze the property against others in the same housing market, a CMA requires you to thoroughly look at the investment property you want to buy in itself. This means taking careful inventory of each of its features and making a list of everything that contributes to the property value.
What Factors Contribute to Property Value?
- Neighborhood
- Square footage
- Lot size
- # of bedrooms
- # of bathrooms
- Total # of rooms
- Age of building
- Recent improvements/updates
- Additional amenities and features
With the help of real estate websites and Mashvisor’s platform, you won’t have any trouble tracking down this information and compiling it quickly and efficiently.
See Also: 10 Factors That Affect Property Value (#7 Will Surprise You)
#2- Find Real Estate Comps
The next step in real estate market analysis is to find real estate comps, or houses that are similar to the one in question given the set of criteria above.
How to Find Real Estate Comps
If you’ve never conducted a real estate market analysis before, you might be wondering how to find real estate comps. Luckily, Mashvisor can provide real estate comps for any property in our database. You can even add a property to the database and the software will work to generate comps for you. This eliminates the need for you to do any research or create spreadsheets for comparison. If you are interested in using Mashvisor’s comparative market analysis tools, sign up now.
When finding comps for your real estate market analysis, you’ll want to collect a minimum of six different properties to compare against, though more is certainly helpful. You want to start by looking in the same neighborhood, within roughly 1-3 miles. Each comp should be within 300 square feet of the property you are conducting the analysis for, and they should contain the same number of bedrooms and bathrooms.
Kinds of Comps
There are two kinds of comps you must look for. The first is recently sold properties, meaning within the last three months. Aim to find at least three properties in this category. Recently sold homes are the best indicator of what the market value should be.
The next category is current listings, for which you should also aim to find three comps. These properties will be used to supplement the data from sold properties.
You should keep in mind that current listing prices might not be an accurate reflection of value; just because a seller has listed a home at a certain price, doesn’t mean it will sell for that much. This is simply the asking price, and a lot can change before it is finally sold. Real estate prices are often a reflection of the current stage of the market cycle, and they are not always indicative of true market value.
Related: Comparative Market Analysis: Real Estate Investing
#3- Determine Your Price
Now that you’ve collected data for your real estate market analysis, how do you determine a fair price?
First, you’ll want to set limits and develop a reasonable range that your investment property will fall into. You can do this by setting your minimum and maximum values.
From your real estate comps, select a property that is reasonably more valuable than your property, and use its price as your ceiling price. Likewise, select a property from your list of comps that is lower in value, and make this your floor price.
Once you’ve set your upper and lower limits, you want to find the specific market value of your investment property. To do this, divide each of your comps’ prices by their square footage. Next, average all of the comps’ price per square foot. Then, take the average price per square foot and multiply it by your property’s square footage. This should give you a good idea of a fair asking price for your property.
Example:
We will use the NYC real estate market as an example. Imagine your three comps are priced at $380,000, $400,000, and $420,000, reflecting the median home price of $400,000 in New York City.
Home A: $380,000/ 1,000 square feet = $380 per square foot
Home B: $400,000/ 1,200 square feet = $333 per square foot
Home C: $420,000/ 1,300 square feet = $323 per square foot
$380 + $333 + $323 = $1,036
$1,036 / 3 = $345 (average price per square foot)
Now imagine that your home is 1,100 square feet, roughly the New York City real estate market average. Multiply the average price per square foot by your home’s square footage.
$345 x 1,100 = $379,500
As you can see, real estate market analysis is an important step when buying investment property.
Using real estate market analysis is an essential part of your real estate investment strategy. It has never been easier to find the real estate data and comps you need, thanks to Mashvisor. To gain access to the best comparative market analysis tools for real estate investors, click here.
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