BASICS: Comparitive Market Analysis

Real estate investing is based on a very simple formula. Sell a property for more than you paid for it. To do this, you need to know what a home is worth. Determining a home’s value is fairly simple. No matter where you live, home values are determined by the sales price of other homes in the area. Realtors call this a comparative market analysis.

Market analysis is based on comparable properties. Just because two homes are in the same neighborhood doesn’t mean they are worth the same amount of money. Comparable properties are similar in size, number of rooms, lot size, amenities like garages and pools, and in the same general area. You cannot compare three bedroom homes with four bedroom homes or a 1200 square foot home with a 1900 square foot home even if they are in the same neighborhood.

Once you have several comparable homes, they have to be sorted by the sale date. The real estate market is constantly fluctuating, so the only way to know what a home is worth at that time is to know what people have paid for similar homes around that time. Aim for 3 or 4 similar homes that have sold within the last 3 months. This gives you a price range for the home in question.

This formula for determining a home’s value is simple enough, but it’s not foolproof. Two issues may arise, especially in a down market: homes without nearby recent sales and homes without nearby comparables. In either of these situations, you can expand your search to include homes sold within the last 6 months or find homes in a similar nearby area.

The key to accurately determining a home’s value is to find out what people have recently paid for similar homes in the same general area. Once you master this, you will be able to gauge what a property is worth and what you can expect to make in profit once you sell it.