Analyze Your Market - Over-Analyze to Under-Analyze

[Belgenman Neal]

I been reading the two of the biggest mistakes of Newbies... Is Knowledge and Knowing The Market.

To increase my Knowledge I want how to Properly Analyze My Market.

How much Should I Analyze the Market and When is it Overload of information.

What data do you have in your Spreadsheets: Prices, Repairs, Rent etc.

How do you sort your markets.

[Bill Gulley]

While I'm a numbers type, I don't try to analyze "data", that's because common sense and construction knowledge are usually a much better indicator. I do look at market rents, that is easily found by watching rental ads of comparable properties in price ranges in various farm areas. As Aaron mentioned, I look at DOM through the MLS and asking prices of comps together with the closings sold as a % of the asking price. (Sales may be 93% of asking price on the average). That's about it as to data.

The other aspect is the grapevine, simply staying abreast of how the market is moving, what concessions are common, types of financing with contract to close times will tell you is a good indication of the movement in the market and how busy the related players are, lenders, appraisers, inspectors, surveyors, title plants and settlement agents.

Construction knowledge, meaning costs for repairs, know what the trades are getting or what you labor costs might be, know costs of materials, generally and the time required for repairs.

The biggest key is understanding your money side, how you'll swing it and the costs together with the valuation of the property. If you can work through the steps of an appraisal to estimate the value you'll be 75% over the hump.

Knowing the market, well, yes you need to know the market. But to what extent?

My son called last night saying there was a brick, 3/2/2 in the burbs of DFW, a nice area. He knows the seller. I didn't have a clue about the rental market and my son guessed. I looked at the listing, over 20 pics.  20% down, 4.5% fixed, no points. We know what the other offer is. I told him we would take it at 500 bucks more and the seller will sell to us rather than to others anyway, it's pretty much the listed price.

I looked at the average price in the neighborhood, this was 40K below and the size and style is comparable to all others except one larger home around the corner. It's a 10 year old home. Looked neat as a pin, no maintenance issues, 2 year old roof, no updating required.

How does that apply to this topic, each opportunity is different, I know generally what a house in that type of location, size and style, amenities, etc. go for in Texas, the market there is hotter than mine and prices are about 10-15% higher in the newer 3/2/2 category and you usually have larger yards. That's pretty ball park analysis. The condition of the property is very good.

It becomes common sense, run the numbers, PITI, estimated maintenance, vacancy and look at the range of rents, it cash flows at 300 bucks not considering tax benefits. It's a buy. It's a good deal, not a fantastic deal, not a steal, just a good deal worth the brain damage. I told him to write it up, contingent on financing and home inspection. Now, we don't expect any issues at all.

Why a financing contingency? Because it's a given in such offers, common and expected, not an issue to most all individual sellers. We don't really know the market, not like I do here, financing requires an appraisal, that will indicate the market. If it doesn't appraise we're out. If title is a problem, we're out (maybe), if there are any financing issues with the property then the bank won't go there and we are safe and get the EM back. The other contingence is the home inspection, same common acceptance aspects, and we want particular attention paid to the HVAC, foundation and attic space. Most of that is just need or want to know. ( A 2 year old roof on a 10 year old property tells me there must have been damage or leaks, I want the insulation and under roof decking checked). 

That's where construction knowledge can ease your mind.

Point is, churning through numbers trying to figure out the average income of tenants or owners is silly. Doing spread sheets is silly, this is not an emotional buy, it is what it is. An offer was made in 2 hours after it was listed. That's an indication of not only the market but also the value, we beat the offer and get it signed and it's over.

So, while I have always said you need to know your market, that comes from time in your market being aware of price ranges, locations and economic aspects.

But the biggest mistakes newbies make is not understanding the valuation process, being able to spot a decent deal and then moving on it. Spinning your wheels with spread sheets and your nose glued to your computer running MLS data means you'll miss the deal. Common sense needs to kick in and you need to belly up to the bar and act! Generally, the more number crunching you have to do on a property the less of a deal it is. If you have to run ratios and data to slice out a marginal profit or cash flow it's probably not a good deal, it's just a deal.

The market around DFW is hot enough, common knowledge, the population and economic aspects don't really need to be detailed, you are safe to assume in such general areas. If this property were in Ava, Mo. I'd take a closer look at market conditions and economic factors.

Hope this makes sense to you, stay away from overkill with your calculators, you knowledge of the market takes time, not so much analysis. :)