One of the ABCs of real estate investing is real estate market analysis. As a real estate investor, you will sooner or later bump into this important procedure when selling or buying an investment property. In this blog, we will show you how to do a real estate market analysis and present the best real estate market analysis tools that will make this task less complex and more efficient.

Real Estate Market Analysis: Definition

Real estate market analysis, also known as comparative market analysis (CMA) is the process of valuating a real estate property based on recently sold similar properties in the same geographical location. Similar properties are referred to as real estate comps or comparables since their values are compared with the investment property in question.

Real estate market analysis can be performed by real estate agents as well as real estate investors to help them determine the price to list when selling an investment property or the price to offer when buying an investment property. However, since no two properties are exactly similar, certain price adjustments have to be made. Note that a comparative market analysis is not a professional real estate appraisal and therefore, cannot be used by lenders to issues mortgages.

Related: Real Estate Market Analysis in 6 Simple Steps

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Value vs Price

Before delving into the real estate market analysis process, it is important to explain the difference between value and price of real estate, a common misconception that even the most experienced real estate investors fall into. In theory, a property’s value represents how much the property is really worth, whereas its price, represents how much it costs to buy it. In reality, the price paid to buy a real estate property might not always be the same as its market value.

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The most common reason that makes for the difference in price vs value is the absence of property valuation process and real estate market analysis. Therefore, a well performed real estate market analysis can help avoid underpricing or overpricing an investment property.

Related: What Do You Need to Know About Real Estate Property Valuation?

Performing Real Estate Market Analysis

Whether you are a landlord, property buyer, or a property seller, it is important to acquire a certain level of knowledge of your local real estate housing market or the market you intend to invest in. The following steps explain how to perform a real estate market analysis in any market.

Step one: Get to know the location

Location of a real estate property is a decisive factor in the valuation process. Most beginner real estate investors prefer investing in a property close to their local area. This strategy is not necessarily the best option as there might be better investment opportunities in other locations, but the advantage here is knowing the location or neighborhood. You know why people would/wouldn’t want to live here and what attracts them to this area. Start the market analysis process by knowing the location of the investment property in question. Use google maps to mark all points of interests around the property such as public transportation, business districts, public facilities and main roads. Knowing the location of the real estate property makes it easier to perform real estate market analysis.

Step two: Analyze the investment property

Start the real estate market analysis report by creating a list that describes the characteristics of the real estate property. This step is important to find reliable real estate comps. Main characteristics to include in the list are:

Square footageLand areaNumber of floorsNumber of bedrooms and bathroomsAge of buildingNoise levelAdditional amenities

Step three: Find real estate comps

The next step in performing real estate market analysis is finding real estate comps. 3 to 5 real estate comps would be sufficient for the analysis process. How to find real estate comps? Follow this guide:

1- Locate properties within 1-3 miles radius.

2- Properties must be sold within the last 6 months.

3- If you can’t find recently sold properties, look at pending lists.

Related: How to Find Real Estate Comps Most Effectively

Step four: Compare the data

The final step of a real estate market analysis is comparing the market value of real estate comps to the investment property in question. The easiest way to do this by finding the price per square foot of each real estate comparable then multiplying each by a factor that accounts for differences between real estate comps and the property in question. For example, if the two properties are equal in size, number of rooms, period of construction but the property in question has a fireplace and a balcony, then the price per square footage of the comparable is multiplied by an adjusting factor less than 1 (between 0.8 and 0.95). After adjusting all prices, an average price per square foot is calculated. The market value of the property in question is then calculated by multiplying the average price per square foot by its square footage.

Real Estate Market Analysis Tools

The main purpose of real estate investment tools is to help real estate investors find investment properties without wasting time and effort. A great tool that can be useful when performing a real estate market analysis is the investment property calculator. Mashvisor’s investment property calculator provides real estate investors with metrics important to evaluate the performance of investment properties. Such metrics include cash on cash return, cash flow, and cap rate. Knowing these metrics facilitates finding real estate comps for a more accurate market analysis.

Other important tools that Mashvisor provide are our own property finder and heat map analysis. Both can be used by real estate investors or landlords in the valuation process.

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