When you are investing in real estate, the very first step is to do your research. How is the real estate market now? How can you make profit? To answer those questions, a real estate market analysis template is necessary.
So what is a real estate market analysis template? How can you use this template to help you better invest? Simply put, a real estate market analysis template helps investors understand what’s happening in a local real estate market. It assesses trends in prices, rents, transaction volume, absorption, and foreclosures to provide investors the information they need to make informed pricing decisions.
What Is a Real Estate Market Analysis Template?
New real estate investors tend to get tunnel vision when they find their first investment property. In other words, they’re often so excited about finding a property to buy, that they often fail to take a step back and look at the bigger picture of the local real estate market. While I certainly understand this excitement, this approach can hurt investors, as it uses emotion instead of facts as the basis of decision making.
Real estate market analysis templates provide a structured methodology to avoid the above tunnel vision. More precisely, these templates provide investors a means to understand what’s happening with real estate in a given area. And, armed with this information, investors can then make informed, logical (as opposed to emotional) pricing decisions, both for acceptable purchase thresholds and sales listings.
Okay, so what does a real estate market analysis template actually include?
While you may see different wording on different versions, a thorough template will include the following five major parts.
Overall Price Gains or Declines
The first major part of a real estate market analysis template analyzes overall price gains or declines in a market. As such, this metric represents a “20,000 foot” level analysis, providing investors a broad overview of the general pricing trends in a market.
With this overview, investors essentially ask the following question:
Are real estate prices going up, or are they going down?
By reviewing a combination of current listings and recent sales, investors can gain insight into overall pricing trends. If the average current list price for two-bedroom, one-bathroom single family homes exceeds the same average from a year ago, investors can fairly confidently confirm that prices are increasing in a market. Conversely, if those same averages today fall beneath the prior year’s averages, overall prices are exhibiting downward trends.
And, today’s technology makes this sort of analysis extremely easy. Whereas investors used to need to manually compile and analyze this information, internet listing and data services like Zillow allow you to analyze these trends for a market with a couple clicks of your mouse. Furthermore, with this technology you can focus all the way down to a block-by-block level, meaning you can generate extremely market-specific data.
Rental Increases or Decreases by Property Type
The next major part of a real estate market analysis template looks at rents. Specifically, investors want to understand whether average rents in a market are increasing or decreasing. And, a thorough analysis will provide analysis down to the property-type level, a critical level of fidelity for discerning investors.
If you only know that, over the past year, average rents have increased from $1,000 to $1,500 per month, you could come to an inaccurate conclusion about general rental trends – and make an investment property purchase that may not actually make sense.
For example, that $500/mo increase could be the weighted result of a major increase in rents for single-family homes and a decrease in townhome rents, a possibility depending on your unique market. And, if you were considering buying a townhouse based on this misleading aggregated average, you’d be hit with an unpleasant surprise about market rents after buying and listing this property.
As the above example makes clear, when analyzing rents in a market, you need to break this analysis down by property type. In other words, you don’t just need to understand trends in average rents, you need to understand trends in average rents for two-bedroom, one-bathroom houses, for three-bedroom, two-bathroom houses, for studio apartments, etc.
This level of detail enables investors to make informed decisions regarding current and potential rental properties. If you own a vacant two-bedroom, one-bathroom townhouse, increasing average rents for that property type suggest a higher advertised price. However, decreasing average rents for these properties means that you may need to lower your listed price to lock-in a tenant.
Recent Sales Transaction Volume
The next element of a real estate market analysis template addresses recent sales volume. More precisely, investors need to ask how many sales have occurred in the past 30 day? 60 days? 90 days? Six months? One year?
This information provides further insight into whether a market qualifies as “hot” or “cold” for sellers. If the past 30 days saw two times the number of sales as the 30 days prior to that, that may indicate that a market’s heating up, information that could absolutely influence an investor’s decisions, either for buying or selling investment properties.
Furthermore, thorough templates will break this information down into the following level of detail:
- Sales volume by number of transactions (e.g. 15 sales in the last 30 days).
- Sales volume by dollar amount (e.g. $3.4 million of sales in the last 30 days).
- Sales volume price per square foot (e.g. $105 average price per square foot for sales over the last 30 days).
The first two metrics above provide insight into the overall sales trends over a period of time, while the final one gives investors a quick “back of the napkin” metric for analyzing a property. If the last 30 days have seen an average price per square foot of $110, you’ll be able to quickly conclude that a new listing for $150 per square foot doesn’t make sense.
Absorption Rates
After knocking out the above parts, a solid real estate market analysis template will analyze absorption rates in a market. Put simply, absorption measures how many new homes came onto a market, and how many of them actually sold.
More precisely, real estate market absorption rates measure the rate available homes sell during a given time period. To calculate it, investors need to divide the total number of homes sold in the given time period by the total number of listed homes during the same period. For example, let’s say that over the last 30 days in target market:
Scenario 1
- Number of homes listed: 100
- Number of homes sold: 30
- Absorption rate (30/100): 30%
Scenario 2
- Number of homes listed: 100
- Number of homes sold: 75
- Absorption rate (75/100): 75%
In isolation, neither the absorption rates in Scenario 1 nor Scenario 2 would likely mean much to you. However, when you compare them, it becomes obvious that far more demand exists in Scenario 2, as homes sell at a rate of 75%, far better than the 30% rate in Scenario 2.
Furthermore, investors can interpret these rates to determine time on market. If homes are sitting on the market for an average of 60 days prior to going under contract, investors may not want to sell, as demand seems low. On the opposite side of the coin, for investors looking to buy homes, this time on market information can provide key leverage in price negotiations.
If sellers are locking down contracts within a couple days, you don’t have much leverage as an investor to push for concessions or price reductions. Why would a seller accept a bottom dollar offer when he or she knows an asking-price (or greater) offer will likely come in shortly? But, the opposite proves true, as well. If a market is dealing with extended average time on market, an investor may be able to make a bottom-dollar offer that a seller accepts due to lack of other offers. In other words, a seller may choose to jump at any offer instead of waiting longer and hoping for a better one.
Foreclosure Information
Foreclosure information represents the final part of a thorough real estate market analysis template. While most people have heard the term foreclosure, not all investors fully understand what this process entails.
A foreclosure is a legal process lenders use to recoup money owed on a defaulted loan. Taking a step back, when borrowers take out mortgage loans, they pledge the home as collateral for the loan. That way, if they default on the loan (that is, stop making payments), the lender has some recourse to recover funds. Specifically, lenders can seize – or foreclose upon – the home, sell it at auction, and use the sales proceeds to pay off some or all of the outstanding loan principal.
Having provided that background, investors want to understand about a market’s foreclosure information for two main reasons.
First, foreclosure rates provide keen insight into the macroeconomic trends in a given market. In other words, if foreclosure rates are accelerating, it likely means that an area is facing negative economic trends (e.g. industries leaving an area, decreases in tourism, re-routed transit corridors, etc). These negative trends may make an investor more bearish on a given market, leading him or her to decide on investing elsewhere.
Second, and somewhat counter to the above, some investors view foreclosures as great buying opportunities. While massive foreclosure rates may speak to negative market trends, all markets will experience some foreclosure levels. And, if a market generally remains strong, some investors view the foreclosures that do happen as bargain buying opportunities, as banks typically auction foreclosed properties at far below market value.
Regardless which of the above two camps you fall into, foreclosure information provides critical information about real estate markets. And, this information combines with the other four parts outlined above to provide essential information to support investor decision making, a reality I’ll outline in the next section.
How Real Estate Market Analysis Template Relates to Pricing Strategy
As a properly completed real estate market analysis template takes a fair amount of time and effort, and I never advocate doing work just for the sake of doing work. Having said that, all this analysis enables investors to develop informed pricing strategies.
Are prices going up? Are they going down?
What should I offer on an investment property?
How much should I list a flipped property for?
Should I rent my property for X or Y?
These include just some of the questions that go into an investor’s pricing strategy, and they cannot be accurately answered without the background information provided in a market analysis template.
And, it’s important to note this distinction between a market analysis template and a pricing strategy. The former provides background information on an entire market, while the latter provides detailed information based on a competitive market analysis. More precisely, this market analysis looks at a specific property, comparing it to three active and three recently-sold properties.
However, I liken developing a pricing strategy before completing a market analysis template to putting the cart before the horse. Knowledgeable investors will want to understand the background information provided by these templates before making a pricing decision based upon a competitive market analysis.
To fully understand what I’m talking about here, I need to provide a little more background on competitive market analyses. As stated, when I complete these, I look at listing and sales comps to inform my pricing decisions for a given property (either to buy or sell). But, a given market may have dozens of comps to choose from, so how do I decide which ones to use in my competitive analysis? Here’s where the work I put into the market analysis template pays dividends.
If my template tells me that overall prices have been decreasing over the past six months, sales volume has decreased over the same period, and an area’s experiencing record foreclosures, that information will combine to help me decide which comps to choose. With such negative trends, I’ll likely select sales and listing comps on the low end of the spectrum to inform my own pricing decision.
On the other hand, if prices have been increasing, sales volume is through the roof, and foreclosures don’t exceed historical norms, I’d tend to be bullish on that particular market. As such, in completing a competitive market analysis, I’d likely select sales and listing comps on the higher end of the spectrum when determining my own pricing strategy.
Using Investor’s Edge to Inform Decision Making
In using a real estate market analysis template to inform your pricing strategy, I highly recommend using our Investor’s Edge software. We’ve poured our team’s collective decades of real estate experience into optimizing this program for investors. Once you’ve gained insight about an area with your market analysis template, Investor’s Edge lets you select from dozens of parameters to filter your ideal properties from a database of millions.
And, you can save your searches within your profile, so every time you log into the system, you’ll receive notifications regarding any new properties that fit your unique pricing strategy. Put simply, Investor’s Edge can help you bridge the gap between the market-wide information your template provides and actually finding your ideal investment property.
Final Thoughts
Whether you choose to do a full real estate market analysis template as an investor is ultimately up to you. But, I hope, if nothing else, you take this away from the above article: solid pricing decisions depend upon accurate and thorough market information.
If you don’t understand what’s happening in a market, how can you realistically expect to make the right decision about A) how much to list a property for, or B) how much to offer on a potential property? Put bluntly, you can’t.
And, completing a real estate market analysis template doesn’t need to be binary, that is, you don’t have to decide between doing an in-depth template and not doing anything at all. Rather, these templates exist on a spectrum of time, effort, and detail. While you may not have the time to create an extremely detailed template, this doesn’t mean that you can’t pull some basic details about the above five metrics in your particular market. Once again, some information is far better than no information when it comes to making informed real estate decisions.
At the end of the day, solid information provides the foundation for solid decision making.
COMMENTS