Comparative Market Analysis: Real Estate Investing

This series of articles aims to explain the different aspects of investment analysis in real estate investing, which include investment property analysis, comparative market analysis, and the property valuation methods, while also explaining the different aspects of each and the tools used to conduct investment analysis with ease and at high efficiency.

• What Is Investment Analysis?
• What Is Comparative Market Analysis?
• What Are the Different Market Analysis Tools?

Comparative Market Analysis

Real estate comparative market analysis is a method used to determine the market value of your investment property by analyzing the area and comparing your investment property to other similar properties in the area.

If you’re new to real estate investing, then sooner or later you will come across comparative market analysis during your investment analysis.

Since any investor, whether investing in real estate or in the stock market or any other type of investment, has to conduct investment analysis in order to determine the quality of his/her investments and whether these investments are worth the while or not, then any real estate investor will have to conduct comparative market analysis at some point during his/her career.

Once you’ve conducted your first comparative market analysis, you will immediately understand the value of market analysis during investment analysis, and you will never invest in a property without doing comparative market analysis first.

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So, what is comparative market analysis? What are the different aspects of comparative market analysis? And how can you use it to decide whether your investment will be successful or not?

Let’s find out.

Real Estate Comparative Market Analysis

Real estate market analysis, also known as comparative market analysis, is a study of a certain market and the current property values within that market in comparison to yours, which is used to determine the market value of your investment property.

This, however, is different from an appraised value, which can only be provided by a licensed appraiser. So, the comparative market analysis that you conduct has no legal or financial value beyond helping you determine the value of your property within a certain market for your research purposes.

Conducting real estate market analysis can be somewhat intimidating for new real estate investors due to having to deal with a large amount of data and comparing a number of different properties with one another.

There are several factors that you need to take into consideration when doing market analysis, but just like investment property analysis, comparative market analysis is a must for real estate investing and for doing investment analysis, and any real estate investor can’t do without it.

So, in order to make the process of market analysis less frightening and more manageable, it is important to take a systematic approach and perform the different steps diligently.

Related: What You Must Know About Real Estate Investment Analysis

The Different Steps of Comparative Market Analysis

Step 1: Conduct Investment Property Analysis

The first step to any real estate investment analysis is the investment property analysis.

Since comparative market analysis relies on comparing your investment property to other similar properties in the area, it is important to first do investment property analysis in order to determine the different aspects that will be compared and to define your property type and other features that will be compared with other similar properties.

So, to do investment property analysis, a real estate investor would first need to determine the following aspects of his/her investment property:

• Location, area, or neighborhood
• Size and square footage of the property
• Land area
• Number of bedrooms and bathrooms
• Number of floors or levels
• The age of the property
• Amenities and features such as a yard, a swimming pool, a fireplace, balconies, etc.
• Location with respect to public services and amenities such as roads, transportation, shopping malls, entertainment facilities, etc.
• Recent improvements

Once these aspects of your investment property have been determined through investment property analysis, you will have sufficient information to identify the other properties in the area that are similar to yours in order to do comparative market analysis.

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Step 2: Compare Against Recently Sold Properties

Your next step in conducting comparative market analysis is to identify a number of recently sold properties that are comparable to your investment property in the area you’re targeting.

Typically, it is recommended to search within a radius of 1-3 miles around your property. You should also aim to look at homes that were sold within the past 3-6 months.

In order to conduct your comparative market analysis, you will need to find 3-5 comparable properties, which are properties that are similar to yours in terms of their size, age, location, and the other features that were identified in step 1 when doing investment property analysis.

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Step 3: Look for Current Listings of Comparable Properties

Similar to step 2, you will need to search a radius of 1-3 miles around your property and find 3-5 comparable properties that are active listings.

When compared with active listings, you should always keep in mind that the listed prices are estimated, and they may not reflect the actual value of the properties that you’re looking at.

This is because it is very common for property sellers to list their real estate properties at prices that are either above or below the actual value of the property in an attempt to sell the property at a higher price or to attract more buyers.

It is also important to note that the value of unsold properties is highly affected by the market trends and events that affect real estate in general.

When looking at a seller’s market, you should keep in mind that sellers tend to inflate the values. While in a buyer’s market, the buyers would attempt to deflate them.

For this reason, when doing comparative market analysis, active listings should only be used as a supplement to the recently sold properties’ values.

Of course, you can always use Mashvisor to obtain the current listings as well as listings of recently sold properties in order to make this process much easier.

Step 4: Consider Pending Listings

In comparative market analysis, pending listings are among the most useful listings to acquire the data from.

This is because pending listings are deals that have recently been finalized but haven’t been fully closed yet.

Pending listings can give you a very clear idea of how the market is performing at this very moment, and it gives you an accurate value of the prices that properties are actually being sold at in the market.

Again, you can use Mashvisor to look specifically for pending properties in order to acquire the necessary data.

Step 5: Look at Expired Listings

Looking at expired listings is a great way to determine the price ceiling and avoid valuing your property at a price that is considered too high.

Listings typically become expired without being sold due to their prices being too high for their market or for the type of real estate property.

In order to obtain the information needed for comparative market analysis, these are some of the sources that you can use to see expired listings:

• The Federal Housing Finance Agency (FHFA) website can be a very useful tool for your market analysis as it provides data on recently concluded sales within the region, including all home mortgages backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration.
• The FNC Residential Price Index is another very useful source for understanding market trends in the area it covers, and it is available in over 20 metropolitan areas based on home appraisals.
• Additionally, there are a number of other real estate websites and sources through which you can see the prices of recently sold properties and active listings. Although not all of these sources can be reliable or accurate, some of the best websites that can provide you with such data are Zillow, Trulia, and Redfin.

Steps 6 & 7: Identify the Ceiling and the Floor Prices

Once you’ve gathered enough data, it is time to choose two properties from the 5-10 comparable properties that you’ve found in order to determine the ceiling and the floor prices.

To identify the ceiling price, you need to look for a property that you’re certain would be worth more than yours. The price of this property will be your ceiling price.

Next, you will identify one property which you’re certain would be worth less than yours. The price of this property will be your floor price.

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Step 8: Compare the Properties

Now that you have a number of properties to compare against your investment property in the same market, and after you’ve determined the price range for your property, it is time to compare your property against the other properties in terms of size, age, amenities, renovations and improvements, subjective features, location, etc.

At this stage, it would be a very good idea to drive around the neighborhoods and take a look at the exterior of the sold properties, which can help you identify any unique features about these properties and the areas they are located in.

Note: Click Here to Start Comparing Properties Right Now!

Step 9: Conduct Comparative Market Analysis

Now that you have all the data that you need in order to conduct comparative market analysis, it is finally time for you to take a broad view at this data in order for you to determine the value of your investment property.

Based on the comparisons, you should be able to determine the price of the property that you intend to buy or sell based on the prices of other similar properties in the market. By doing so, you will have identified the market value of the property.

Related: How Mashvisor Revolutionized Cap Rate and Investment Property Analysis

Bottom Line

Together, comparative market analysis and investment property analysis make up what is generally known as investment analysis.

Both types of analysis are crucial for your investment, and without them, you risk losing a large amount of money due to basing your decisions on estimations and non-factual data.

In order to do investment analysis to determine the different aspects of your investment and its viability, it is very important to conduct comparative market analysis to get a better idea of where your property stands within the market, and how it compares to other similar properties in order to decide on its price.

If you still believe that comparative market analysis is too daunting or too intimidating to do on your own, keep in mind that you can always use Mashvisor to make the process of conducting comparative market analysis much easier and less time-consuming.

Mashvisor can provide you with all the data needed for comparative market analysis, from the prices of properties that are currently listed, through pending properties, to properties that have just been sold, along with all of their data. Head over to Mashvisor and start your property search right away!