Getting to Know Your Market and Evaluating Properties Within It
Author: Joshua Dorkin • URL: http://www.biggerpockets.com/June 24th, 2007 •
The first thing people seem to want to know when looking at real estate is what a property is worth. One of the keys in figuring this out is figuring out the market that the property itself is located in. Obviously these are extremely important pieces of information to know, and there are many different methods to use to do it. Unfortunately, there is only one that really makes sense for an investor. Lets look at the various options, though:
Ask A Realtor
This is typically what novice investors, as well as the realtors themselves will recommend. We have been taught that once you become a real estate agent, you suddenly know how to value properties. There is nothing further from the truth. Learning to evaluate property values is a skill that takes time and energy. You must hit the trenches to be able to do this, and that takes time. Seasoned agents are great resources, but real estate investors should not count on them to do their homework for them.
Remember that real estate agents make money when you buy or sell a property. They are salespeople. If you don’t buy something from them, they get no commission from you. It is in their interest for you to think that now is the time to buy, no matter how bad a market is. What I’m getting at is that you can never trust a salesman to give you the whole truth. While agents may know a market cold, are you going to trust someone who must convince you to buy now in order to make a living? For this reason above all others, it is imperative that you not rely on real estate agents to tell you what a market looks like.
Use The Internet
With the explosion of “property value websites” that use public records to give cool mapped out, graphical, representations of different marketplaces, the internet has changed the way people learn about real estate markets. These sites want their users to believe that they are providing an accurate picture of what a property is worth. They dazzle you with comparable properties that have sold, maps, charts and graphs, and more. Unfortunately, someone who does not understand how to truly evaluate a property themselves, will walk away thinking that they are getting a real value that means something.
This is untrue. While these sites are great tools for getting started, they should NEVER be used as a substitute for doing what it takes to understand a market, and thus, the value of a property in that market.
Get to Know the Market Yourself
There is no substitute for learning a market the old-fashoned way. As an investor, you need to see the neighborhood from the ground. You need to walk the streets, talk to the neighbors, and look at houses. Visit every property for sale in your market. Look at what they are selling for, their size, their ammenities, their flaws. If you get out there and see 50-100 properties that are for sale in an area, you’ll have a pretty good understanding about that market.
You won’t need a real estate agent, and you won’t need the internet. You will instantly develop an understanding of property and market values almost without knowing. If you do use a realtor, you’ll be able to know if they are correct in their analysis, but most importantly, when the time comes to look at a property that you’re interested in, you will know on the spot if it is fairly valued, overvalued, or if it is what we’re all in the game to find, a deal!
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Joshua Dorkin
Charles Feldman
Ted Karsch.
Troy Schuricht
Anwell Tsai
Richard Warren
Jim Watkins
I think you’re right, you need to pull together all the information you can, both from the internet, agents, and then actually walking the property you’re interested in buying.
I think if you have a connection to the area, whether a friend or family, then that makes it ideal. You have someone or have insider knowledge of the market in that area and enables you to make better decisions.
I couldn’t agree more with your comment that Realtors are not the best way to go to determine valuations. I flip properties, and was frustrated enough with realtors, and their lack of saviness with data analysis that I decided to get a broker’s license myself and do the analysis on the MLS data myself. I am continually amazed at the comps that are used in my appraisals from ‘certified’ appraisers. I get the feeling these guys take 10 minutes to do a report, collect the $400, and then never think about the property again. I’ve resorted to using an Excel Regression model to account for the different variables in my analysis (sq ft, bedroom and bath count, lot size - and most importantly, a subjective quality variable for the overall condition) to see how the market values different aspect of the properties. I wish the hurdle to become a broker were higher so that the public’s trust of the industry would not be unfounded (I got my license in about 3 months from start to finish).
Great blog - this is my first comment, but I have enjoyed reading all of your posts (and have blogrolled you on my blog).
You mean investors should expect to put forth some kind of effort if they want to be successful? What a novel idea!
I completely agree. If you’re going to put money into an investment, why wouldn’t you want to know as much as possible about it?
Brice - Crazy idea, huh? Too many people are just lazy and want others to do all the work for them. If you want to be successful at anything, especially real estate, you’re going to need to work.
10 minutes to do a report, collect the $400, and then never think about the property again. I’ve resorted to using an Excel Regression model to account for the different variables in my analysis (sq ft, bedroom and bath count, lot size - and most importantly, a subjective quality variable for the overall condition) to see how the market values different aspect of the properties. I wish the hurdle to become a broker were higher so that the public’s trust of the industry would not be unfounded (I got my license in about 3 months from start to finish).
Yes, all success comes from hard work, buy many people use other peoples hard work to make it easier from themselves.
Don’t forget the additional tool of County Land Records. I’ve found already (I’m a newbie) that comps from several different places are valuable, as they don’t all reflect the same info.
I do like the recommendation about using the internet. I can’t remember where I saw it, but the recent study which found sellers getting better prices who did FSBO on the internet versus traditional sales through realtors was Very interesting reading. As always, your posts are enjoyable and informative, thanks!
You offer very good advice. I am currently in the market for a house and will use your advice to learn about this stuff.
There is definitely no such thing as too much information concerning your potential investment. Solid advice.
I had such a good handle on the market the last time I sold, but things are so in flux here right now that I am even getting wildly different answers from various professionals. Talk about frustrating.