“Should I get a real estate market analysis or a home appraisal done?” It happens often that beginner real estate investors confuse these two types of property valuation methods. That’s why we hear this real estate investing question so often.
The Short Answer: As a real estate investor, you’ll find yourself dealing with both a real estate market analysis and a home appraisal during the real estate investing process. When buying an investment property, both property valuation methods are needed at different stages. Even when selling an investment property, a real estate investor is likely to deal with a real estate market analysis and a home appraisal of the real estate investment.
That answer is short and simple, but it only opens up the door to more real estate investing questions. So, what is a real estate market analysis? How do you perform one for a real estate investment? What is a home appraisal and when is it necessary? If they are both considered property valuation methods, what are the major differences?
Now all of these questions about real estate investing are spinning around in your head; luckily, all the answers are in one place- right here.
What is a Real Estate Market Analysis?
A real estate market analysis is also referred to as a comparative market analysis (CMA). It is a way for real estate investors to determine the market value of a real estate investment. Knowing how much an investment property is really worth is important for many aspects of real estate investing, as we will see.
The important thing to keep in mind is that the price tag of a real estate investment doesn’t always reflect the true or fair market value. That’s why property valuation is so important to learn when it comes to real estate investing for beginners. So, let’s take a quick look at how to perform real estate market analysis.
Related: This is How Not to Do Real Estate Market Analysis
How to Perform Real Estate Market Analysis
Step #1: The first step involves performing another type of real estate investment analysis: investment property analysis. Before a real estate investor can begin comparative market analysis, he/she must know everything about the investment property in question. Certain features to take note of that will affect the value of the investment property are:
- Size (square footage)
- Number of bedrooms, bathrooms, rooms, floors
- Age of the investment property
- General condition
- Upgrades/amenities (pool, garden, etc.)
- Location (including the general real estate market, neighborhood, and street)
Related: How to Do Investment Property Analysis
Step #2: With detailed information about your real estate investment property, you can perform Step #2: find real estate comps (comparables). Real estate comps are investment properties that share the same/similar features listed above with your investment property. Where can you find real estate comps? For the most accurate comparative market analysis, you should look for real estate comps in a few different types of investment property listings:
- Sold Listings
- Active Listings
- Pending Listings
- Withdrawn Listings
Before moving on to Step #3 of real estate market analysis, be sure to have 3-5 real estate comps or more. Find this step overwhelming? Many beginner real estate investors do. Make it easier on yourself and use an Airbnb calculator. This tool automatically returns real estate comps when you view an investment property listing. Rather than spending time trying to find real estate comps yourself, this real estate investment tool finds them for you.
Step #3: With real estate comps in hand, it’s time to compare them and create a price range. Naturally, your real estate comps won’t be identical. Set them up in a range with a floor price and a ceiling price. The investment property in question will fall somewhere in between depending on its characteristics.
Learn More: Beginner’s Guide to Comparative Market Analysis
When Do You Need Real Estate Market Analysis?
Real estate market analysis is actually one of the property valuation methods you’ll find yourself using the most:
Buying an Investment Property
When buying an investment property, real estate investors find themselves utilizing real estate market analysis a few times along the way. Initially, when looking for the best real estate investments, a real estate investor needs comparative market analysis. Why? Well, how can you find the best real estate investments without knowing their value?
For example, some of the best real estate investments are actually priced below market value. These can bring a great return on investment right away if sold. In order to find this out during your investment property search, real estate market analysis must be performed. It will reveal the actual value of the investment property which you can compare to the price to find out whether you are getting a good real estate investment deal. All of this needs to be done before making any kind of offer on the investment property.
After real estate market analysis is used to compare investment properties and find the best real estate investments, the results are used again when actually buying an investment property. If there is competition for the investment property, a real estate investor may have to raise the offer a few times. All the while, the results of real estate market analysis must be kept in mind to ensure the real estate investor doesn’t end up overpaying and not getting the return on investment he/she had in mind.
Rental Property Management
“How much should I charge for rent?” New landlords are left to deal with this question once the process of buying an investment property has come to end. A real estate market analysis will help to set the price for rent. This is because, typically, rental income depends on the value of the investment property. Landlords tend to charge anywhere from 0.8% to 1% of the value of the investment property as rent.
Selling an Investment Property
If there is time in between selling and buying an investment property, real estate market analysis will have to be performed again in order to set a fair selling price. Not only will real estate market analysis aid in getting the real estate investor a good return on investment but also ensure that the price is competitive enough in the real estate market.
Who Performs a Real Estate Market Analysis? How Much Does It Cost?
As we have seen, a real estate investor can perform real estate market analysis. All that is needed is a powerful real estate investment tool like a rental property calculator. Mashvisor’s rental property calculator, in particular, provides data for investment property analysis (Step #1 of the analysis), real estate comps (Step #2), and allows you to complete comparative market analysis quickly for every investment property you come across on the platform.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
If you’d rather someone else perform real estate market analysis for you, a real estate agent or broker will at your request. It usually costs nothing or is part of the general services if you have hired the agent/broker to assist you in selling or buying an investment property.
What is a Home Appraisal?
The second of the property valuation methods is the home appraisal. It is another way for real estate investors to find the fair market value of investment properties.
What Does a Home Appraisal Consist Of?
A home appraisal can actually be carried out by three different methods:
- Market Data Approach/ Direct Sales Comparison Approach
- Cost Approach
- Income Approach
The method used varies for the investment property and real estate market. Each method is studied and the most appropriate is selected to find the fair market value. Most commonly, the market data approach is used, especially for residential investment properties like single family homes and duplex houses.
The market data approach follows pretty much the same process as the real estate market analysis described above. Once completed, the findings of the home appraisal are put into a detailed report along with the results of the fair market value. The report generally includes:
- A map of the appraised investment property, as well as the real estate comps used
- A sketch of the outside of the investment property
- Photographs of the appraised investment property’s front, back and street view as well as front view photos of the real estate comps
- A description of how square footage was calculated
- The market sales data along with all of the data used to find the fair market value of the investment property
To learn about the other property valuation methods, read: What are the Main Property Valuation Methods?
When Do You Need a Home Appraisal?
Here is where the major differences between a real estate market analysis vs. appraisal come to light. While a real estate investor technically “needs” a real estate market analysis, he/she is never required to get one done before moving on to another step of real estate investing. However, if a real estate investor plans on using a mortgage loan for buying an investment property, the mortgage lender will not approve until a home appraisal is done.
This means that when selling an investment property to a real estate investor using a mortgage loan, your property will also be subjected to a home appraisal.
Who Performs a Home Appraisal? How Much Does It Cost?
A real estate investor, agent or broker cannot perform a home appraisal. Instead, a professional home appraiser carries it out to find the fair market value. The professional has gone through training, taken exams, and usually has years of experience. Professional home appraisers and appraisal companies are also strictly regulated, ensuring they are unbiased and impartial.
A home appraisal will cost you money and is listed in the closing costs of a loan. It can cost a few hundred dollars- anywhere from $300-400.
Related: When and Why Do You Need a Home Appraisal?
Real Estate Market Analysis vs. Appraisal: How Are They Different?
Some of the major differences have been clarified now that you know all about real estate market analysis and home appraisal. Let’s take a quick look at them again:
One major difference to point out is the accuracy. Some might argue that this is a matter of opinion, but at the same time, it is a widely held opinion in the real estate investing world. A home appraisal is considered to be more accurate because the professional appraiser has no stake in the sale of the investment property. This means that the results are considered unbiased compared to that of a real estate market analysis carried out by an agent or broker. This is why mortgage lenders use a home appraisal rather than a real estate market analysis.
Both a real estate market analysis and a home appraisal are vital to a real estate investing career. It is important to learn about both property valuation methods as you will be dealing with both when selling and buying investment property.
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