Real estate investors cannot look at potential investment properties as if they’re the only investment property on the market; they must perform a comparative market analysis.
Comparative market analysis, also known as real estate market analysis, is when real estate investors or real estate agents compare an investment property to other similar investment properties that have been recently sold in the same location. The ultimate point of real estate market analysis is to determine the market value of the investment property.
Comparative market analysis isn’t as difficult as most beginner real estate investors may think it to be; they just need a place to start. This guide to comparative market analysis will help any real estate investor get started in real estate investing.
Why Is Comparative Market Analysis Important?
Beginner real estate investors who avoid comparative market analysis will inevitably run into a few real estate investment pitfalls. One mistake they make is overpaying for an investment property. Real estate investors who do this never see the greatest possible return on investment that the real estate property could have brought them.
These real estate investors also have trouble selling their investment properties. If they don’t know the market value, they price the investment property too high, and no buyer (especially one who has done comparative market analysis) will come near it. They could also end up pricing the investment property too low and miss out on a good return on investment.
Related: What Is a Good Return on Real Estate Investment?
Finally, without comparative market analysis, beginner real estate investors miss out on great investment deals. If an investment property is priced much lower than its market value, buying it and flipping it will give a great return on investment. Not knowing its market value may also lead real estate investors to choose the investment strategy of renting rather than flipping. In this case, rental properties won’t bring in that quick return on investment, and the real estate investor will have missed out as the market is always prone to change. This is why comparative market analysis is a crucial step when investing in real estate.
Finding Similar Investment Properties
The first step real estate investors have to take when performing real estate market analysis is to find properties that are similar to their investment property. They also have to be in the same location. These investment properties are called real estate comparables (real estate comps). To be confident in the comparative market analysis, use at least 3 to 5 real estate comps. While investment properties are rarely identical, look for the ones that have very similar characteristics. Choose real estate comps by looking at the following features:
- Square Footage: Real estate comps need to be close in square footage. It wouldn’t be logical to compare a very large investment property to a much smaller one. The square footage of real estate comps shouldn’t differ by more than 200-400 square feet (plus or minus). Also, consider the amount of land or lot area around the investment properties and the number of floors.
- Age of Investment Property: Real estate comps should have been built within a few years of one another. An older investment property will most likely have a lower value than one that is much newer, even if they’re in the same location.
- Amenities, Upgrades, and Condition: If an investment property has a pool or has been remodeled, it will be difficult to compare to real estate comps that don’t have these amenities and upgrades.
- Number of Bathrooms, Bedrooms, and Other Rooms: Real estate comps should have the same number of bathrooms and bedrooms. Three-bedroom rental properties will be worth more than a one-bedroom.
- Location: While real estate comps should be in the same location as the potential investment property, specifics about the location must also be taken into consideration. If the investment property has walkability to commercial center, it could be worth more than properties that are not.
If real estate comps have a few differences from the investment property, adjustments will have to be made. For example, if a real estate property has an extra bedroom, the value of the bedroom will have to be determined and subtracted in order to use it as a comp. This, however, requires delving deeper into different investment properties and can be a bit more complicated. So, it is best to find properties that are as similar to the investment property as can be.
Where to Find Real Estate Comps
There are a few different listings that these real estate comps fall under. A comparative market analysis requires data from all of these types of properties. Luckily, Mashvisor has a vast database of the listings of real estate investment properties from all over the US to help real estate investors easily find real estate comps.
- Sold Listings: The prices of these real estate comps are the most telling of the market value of the potential real estate property.
- Active Listings: Real estate comps that are still listed will not show the market value of the investment property in question. This is because real estate investors trying to sell are always looking to make the most money they can, so the price can often be too high. However, these listings are useful to a seller in that they show the competition in the market.
- Pending Listings: Investment properties which haven’t been closed yet can show real estate investors the direction of the local housing market. If a real estate property has a higher price than real estate comps on pending listings, they may end up on the market for longer.
- Withdrawn Listings/Expired Listings: While there are many different reasons investment properties are pulled off the markets or expire (seller’s remorse, repairs, etc.), a major reason is an unreasonable price. Real estate investors should keep their price range lower than these comps.
Related: Creating the Best Rental Listings for Your Investment Properties
Determining the Value
The final step of a comparative market analysis is to set a value for the investment property. Look at the chosen real estate comps and their prices. The investment property will fall in the range of these prices. Exactly where it falls will depend on the characteristics: if the investment property has something more or less worthy than another, it will be placed accordingly.
Comparative market analysis can be done by any dedicated real estate investor who wishes to be making money from investing in real estate, even a beginner. A good start is to recognize the best real estate investment opportunities first to avoid performing comparative market analysis on way too many investment properties, only to end up with bad deals. With experience, comparative market analysis will become second nature and will lead to great real estate investments.
Related: What are the Best Tools for Real Estate Market Analysis?