Buying a house? Selling a house? Investing in property?
Whatever your end game, you need a real estate market analysis before talking dollars and cents.
So many factors impact how real estate is priced. Among them are the market in your area, home location, and home size. A comparative market analysis takes all these into consideration to determine the best price to sell for, or offer.
Before we can understand the concept of a real estate market analysis, let’s cover the basics of real estate markets.
Real Estate Market Basics
Real estate markets follow the basic law of supply and demand.
When the supply of for-sale homes is high relative to the number of the buyers, prices go down. When there are more buyers than sellers, prices go up.
Population changes, employment levels, and family incomes all affect demand. Other contributing factors are interest rates, credit availability, and rental pricing.
Buyers moving up to larger homes, new home construction, and sellers downsizing all play a role in supply levels. Relocation and death also play a role.
At times, the law of supply and demand doesn’t work to its full potential. Sellers don’t always sell because home inventories are low. Buyers don’t always buy when inventories are high.
Unexpected relocation, divorce, or financial issues often force homes onto the market. Buyers sometimes lack a sufficient down payment or can’t sell their current home to move up to a larger one.
There are also factors that influence real estate markets differently than other markets.
How Real Estate Differs from Other Markets
The real estate market is seasonal. In northern climates, there’s very little activity during the winter months. Sales are usually highest in the spring and summer and decline in the fall.
First-time buyers are especially important in real estate. Every buyer becomes a future seller. When there are few first-time buyers it affects sellers who want to move up to a larger home.
Financing plays a large role as well. A buyer’s ability to qualify for a mortgage directly impacts demand. Interest rates, lending standards, and available mortgage credit all impact how many buyers are available.
Schools, transportation, and municipal services all impact local housing values. People buy homes on a neighborhood-by-neighborhood basis.
Finally, price differs from value in real estate. Because most homes are financed, each home is worth what a real estate appraiser says it’s worth.
This creates a problem when the price a buyer and seller agree on is higher than the home’s appraised value. We’ll talk more about this later on.
Now that we’ve covered some basics about real estate markets, let’s dive into what a real estate market analysis is all about.
Definition of Real Estate Market Analysis
A comparative market analysis examines prices of properties that have recently sold in a given area.
If you’re selling your home, a real estate agent will prepare a market analysis of homes similar to yours within 1-2 miles. If you’re buying a home, your agent will do the same for homes in the area of the one you’re interested in.
The goal, for a seller, is to price your home at a level that will bring a quick sale at, or near, market value. For a buyer, it’s to determine if the asking price of the home you’ve chosen is reasonable. If it’s not, the real estate market analysis can also help you make the best first offer.
How Market Analysis is Done
Real estate agents have access to data that buyers and sellers don’t. They also use software designed to prepare a detailed real estate market analysis. For our purposes, we’ll discuss how your average buyer or seller would complete a market analysis.
Let’s say you’re looking for a house and have found one that meets all your needs. Now it’s time to see if the asking price makes sense, given the market and the house.
Start by recording the particulars of the property, such as the:
- Square footage
- Number of floors
- Number of bedrooms and baths
- Age of home
- Amenities (deck, patio, fireplace, landscaping, swimming pool)
- Recent improvements (new carpet, kitchen or bath remodel)
Next, assess the neighborhood. Do this by visiting the neighborhood or looking at Google Street View. Questions to answer are:
- How close is the property to major thoroughfares?
- Where are the closest elementary, middle and high schools?
- How close are parks, recreational areas, and retail?
- What’s the curb appeal of other homes in the area?
From there, check out real estate sites like Zillow, Trulia or Redfin. Use their search functionality to locate other homes for sale in the area. Look at the active and recently sold listings to find similar homes.
Homes that are similar in size, age and amenities to the one you’re interested in are called comparables, or “comps.” These should also be no more than 1-2 miles away.
Find 3-5 comps that have been listed or sold in the last 3-6 months. Record the listing or sales prices of these properties.
Take the listing price, or selling price, for each comp and divide it by the home’s square footage. The result is the price per square foot for each comp. Figure the average price per square foot of all your comps.
The last step in completing a real estate market analysis is adjusting the property’s value to account for the home’s distinct features. If the home has a landscaped pond in the backyard, this would add to its value. If the exterior needs repainting, this would subtract from its value.
Let’s put this to work with an example.
A Sample Comparative Market Analysis
You’ve found a 4-bedroom, 3-bathroom, 2,100 square foot home. It’s on a quarter acre of land and it’s listed for $275,000. This is the home you’ve been looking for so it’s time to write an offer.
For your real estate market analysis, you’ve found 3 similar properties. They’re all recent sales in the same neighborhood.
Number one is nearly identical to the house you’re interested in. The only difference is it’s located on a busy street. It recently sold for $275,000.
Number two has 4 bedrooms, 3 baths and is also on a quarter acre. This home is 2,400 square feet and has a screened-in porch. It recently sold for $315,000.
Number three is a 4-bedroom, 2-bath home on a quarter acre of land. It’s 2,100 square feet but both the bathrooms are outdated. It just sold for $265,000.
Based on your analysis, $129.41 per square foot is the average of all 3 comps. Multiply that by the 2,100 square foot home you’re interested in for a fair listing price of $271,775.
You offer $265,000 for the home and hope to settle on no more than $270,000 for a final purchase price.
Ready for an advanced concept?
There are two other types of listings to consider before you determine what to offer.
Other Types of Listings
The first are pending listings. These are finalized real estate deals that haven’t closed yet. Analyzing these listings will tell you what the market is doing right now.
Second are expired listings. Listings usually expire because the price was too high. If your target home is priced similarly to comparable expired listings, it may be overpriced.
This information is especially important when selling your home. As you’ll learn below, overpricing your home is one of the worst things you can do.
Why Comparative Market Analysis is Important
A real estate market analysis is important because it tells you the ideal price for the home you’re looking at buying or the one you’re selling.
A quality market analysis can tell you:
- What similar homes are selling for
- How long they were on the market for prior to selling
- Their pricing history (original listing price vs. final selling price, when the price was dropped and by how much)
If you’re selling your home, this data will help you determine your original listing price. Your listing price, when your home first comes on the market, is the most important factor in how fast your home sells.
This is because the best time to sell your home for a good price is during the first four weeks after listing. Buyers who’ve seen almost every listing are waiting for the right house to hit the market.
Price your home right, from the get-go, and you’ll have the most buyers who can pay what your home is worth. This means your house will sell when you want it to.
What Happens When Your Home Is Not Priced Right
There are consequences when your house is not priced right when it’s first listed. If your house is priced too low, you’ll get a lot of lookers and maybe some offers. But you’ll also lose thousands of dollars on one of your most valuable assets.
Conversely, pricing your home too high can have disastrous results. For example, overpricing your home may cause the following:
- Buyers will bypass your home for others that are a better value. You end up selling the competition.
- Buyers take one look at your price, decide they can’t afford it and won’t bother to schedule a showing.
- Willing buyers may have trouble getting financed. Their lender may not approve the loan if the appraisal comes in under the contract price.
- Your listing gets “stale” as more and more buyers stay away from this overpriced listing.
- As time passes, the temptation will be to lower the price below the competition to make up for lost time. Money gets left on the table.
Another consequence of the appraisal coming in under contract price is lost showings while your home is listed as “show for backup.” Realtors tend to steer their buyers towards active listings that don’t have offers pending.
Let’s Close on That Home
A real estate market analysis is indispensable whether you’re buying or selling a home.
For buyers, it can tell you which homes to avoid or what to offer on the home you want. For sellers, real estate market analysis helps you list your home for the ideal price that will sell it within its first 4 weeks on the market.
Have you ever overpriced your home for sale? What were the consequences? When has a real estate market analysis helped you make the right offer?
Let us know in the comments!