How To Do A Real Estate Market Analysis Like a Ninja

One of the most difficult things about buying real estate, especially for newer investors, is to avoid getting emotionally involved. In a hot real estate market, it’s easy to make the wrong decision when other home buyers are lined up ready to make an offer.

Successful real estate investors always say the money is made when the property is bought, not when it’s sold. That’s because it’s much easier to add value to a property than to try to turn a profit on a house that was overpriced.

In this article, we’ll discuss in detail how to do a real estate market analysis to buy a property that makes good business sense.

You Don’t Always Need a Real Estate Agent to Understand The Market

While asking a real estate agent to do a market analysis for you has some advantages, there are also some big drawbacks as well.

For example, the agent may not have the deep experience and specialized training needed to work with actual creative real estate investors. Or, the real estate agent may be so wrapped up in day-to-day market activities that they’re simply unable to see the big picture that real estate investors rely on for success.

Fortunately, there are several great ways to get the information you need to do a real estate analysis on your own.

Look at historical data first

Before you can understand where the market is going, it’s important to understand where it’s already been. Reviewing online real estate market performance reports from Zillow or the National Association of Realtors makes it easy to learn what’s been selling and for how much.

Dig deep into your target market and neighborhood

Once a specific strategy has been selected for your target market, investors should immerse themselves in everything there is to know about the area.

A great resource for in-depth real estate market information is bestplaces.net. You’ll find everything you need to know arranged in an easy-to-understand format, including:

Market overview
Data on population and job growth
Major employers and workforce education levels
Local housing market activity for the city and metro area
Past, current, and future market trends for properties
Quality of life rankings to help predict future demand for real estate

Use multiple sources to gather unbiased data

One of the biggest drawbacks to relying on a real estate agent for a market analysis is that, at the end of the day, they want to sell you something. By using the internet to gather transparent data from multiple sources you’ll filter out the built-in bias that agents sometimes have.

Resources real estate investors use to gain a broad perspective of the local real estate market include:

Local newspapers
Community websites
Social media
Investment clubs
Online investment portals

Understand how market factors affect investment strategy

The most successful real estate investors choose markets that best fit their investment strategy.

For example, investors focused on cash flowing rental property may find Birmingham or Pittsburgh an excellent match for a long-term buy-and-hold strategy. On the other hand, real estate investors looking for rapidly-rising home prices are opting to invest in markets such as Atlanta and nearly every city in Florida.

Some of the key factors to consider when analyzing a real estate market include:

Property types with the greatest demand
Most active agents and investors
Who the local home wholesalers are
Percentage of renter-occupied households
Housing inventory stock
Where the biggest employers are located

6 Key Steps to Real Estate Market Analysis

When doing a real estate market analysis, it’s best to use recent sales prices rather than asking prices for homes that are currently on the market. That’s because the listing price is what a seller hopes to get, while the final sales price is what the seller actually received.

The steps real estate investors follow when doing a market analysis are similar to what a professional appraiser does. When done properly, there shouldn’t be a significant difference between what you think a property is worth and the price the appraisal comes in at.

1. Research neighborhood quality and amenities

County assessor websites and Street View by Google Maps are excellent tools to use to research and narrow down potential property purchases without ever leaving your office. If the house backs to a garbage dump or major highway you can simply delete the property from your list and move on to the next one.

Other neighborhood qualities and amenities that affect property value include closeness to public transportation, proximity to shopping and schools, and nearby recreational amenities like parks and beaches.

If you have your eye on a particular single-family home, you can also pop in the address into a tool like PropStream. You’ll get a comprehensive report with things like present mortgage information, monthly payment amounts, how long the owner has owned the property, and much more. It is, in our opinion, a must-have tool for any serious investor.

2. Obtain property value estimates for the area

Calculating the average sale price per square foot for home sales in the area you’re considering is a good way to determine a “ballpark” property value estimate. Local real estate agents, property management companies, online listing databases, and the county assessor website are all good resources to use.

Keep in mind that these average calculations are just that. They don’t take into account unique aspects of the house or the neighborhood that may increase or decrease the value of your subject property.

3. Select comparables for your real estate market analysis

Begin your initial real estate market analysis by selecting six comparable properties. Three should be homes in the neighborhood that have sold within the last few months; then choose three more homes that are currently on the market.

When selecting comparables for your subject property look for:

Homes with the same number of bedrooms and bathrooms.
Houses having square footage within 10% to 20% of your intended purchase.
Property with a similar lot size and shape.
Select houses with a similar original construction date, elevation (also known as architectural design), and the number of floors or stories.
Homes with similar features such as a free-standing garage, outdoor swimming pool or patio deck, and scenic views.
Choose homes in the same neighborhood and preferably on the same block.
Select properties that are in the same school zone (because a low-quality school can have a significant negative impact on value).

4. Calculate the average price of comparable listings

With this information in hand, the next step is to create a spreadsheet for all seven properties – your subject property (the one you’re thinking about buying), the three recent sales, and the three homes actively on the market for sale.

Your first column should list each house by address. Then, create individual columns for specific features and amenities:

Selling or listing price
Square feet
Number of floors
Elevation
Age of house
Bedrooms
Bathrooms
Kitchen upgrades
Bathroom upgrades
Recreation room or bonus areas
Enclosed patio or sunroom
Basement
Attic
Water heater and furnace condition
Central air-conditioning and age
Roof age, condition, and roofing materials
Garage, carport, or on-street parking
Swimming pool

After you’ve filled out your spreadsheet, calculate the average price per square foot for each of the seven houses.

5. Fine-tune your market analysis with adjustments to your comparables

Every piece of real estate is unique, so the odds are that not every home on your list of comparables has the exact same features and amenities.

To make sure you’re comparing apples-to-apples, you’ll need to make adjustments to your comparables. An adjustment is something that adds or subtracts value from your subject property.

By using the spreadsheet format you’ll be able to see a pattern of how the specific features and amenities of each house affect the sales or listing price, and the price per square foot.

For example, because swimming pools and newer roofs add value, the price per square foot will be higher. Homes with only two bedrooms will be worth less than three-bedroom homes, and property with an old roof or outdated heating and cooling system will have less value than a house with recently updated equipment.

When you’re finished making adjustments to your comparables, recalculate the price per square foot. This will give you an accurate idea of the fair market value of your subject property.

6. Put your team to work

Now that you have a good idea of what the house is worth, your final step is to get the ball rolling and put your local market real estate team to work.

Have your local real estate agent or property manager visit the property. If you’re still building your team, check out our Sub2Deals Forum for recommendations on people who currently provide high-quality services for investors in your area of interest.

Your boots-on-the-ground team should pay close attention to curb appeal, landscaping, neighboring houses, overall property condition, and the need for any immediate repairs or updating. Out-of-state investors can also use Google Maps or local companies that provide aerial drone video and photography services.

Also, compare the data on your market analysis to the actual features and amenities of the subject property and the information from your property inspection report. Mistakes can and do occur on listings and even county assessor websites.

Common FAQs about a real estate market analysis

Question: Can I find comparables without using the MLS?

Answer: Absolutely. Additional resources for finding recent sales and active listing information include public property records on the county assessor website, Zillow, and tools such as PropStream.

Question: Should I look at expired listings when doing a real estate market analysis?

Answer: Many real estate investors review expired listings and ‘off-market’ listings as a way to gauge what price the market will bear. Usually, homes that leave the market without being sold are overpriced relative to their true market value.

Question: Is a bigger house always a better value?

Answer: Generally, the best houses for real estate investors are the ones that match the median range in the neighborhood. For example, if most of the homes in an area have three bedrooms, smaller homes may be difficult to rent while bigger houses may generate less income per square foot compared to the market norm.

Question: What are the most important factors to consider when selecting comparable properties?

Answer: The three main factors to consider for choosing the best comparables are how recently the property sold, where the house is located in relation to the subject property, and the unique characteristics of each comparable.

Put your real estate market analysis to work

Doing a good real estate market analysis helps you understand where you are in the real estate market cycle and whether it’s better to buy, sell, or hold.

Investors buying property use a market analysis to identify homes that are profitable and offer the best fit for their investment strategy. Sellers create a real estate market analysis to determine the best sales price and marketing strategy.

The fact is that there’s money to be made in any real estate market. Successful investors use online listing platforms to determine potential property returns and market values for rental property throughout the U.S.

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by: William Tingle