Know Your Market Like the Back of Your Hand

If you’re considering investing in real estate one of the first things that you should do to set yourself up for success is to learn your market. As with any profession, in order to be considered the best at what you do, you need to be an expert in your field. As it pertains to real estate, you need to know your target market like the back of your hand. You need to know the neighborhoods, property prices, trends, and growth patterns in that area.

Knowing this basic but fundamental information will not only make you a better investor but also help you to make offers and take action faster. Imagine that a homeowner contacts you to sell their home or house gets listed on the market, and you’re not informed about the neighborhood, don’t know the price points associated with that area, and take forever to do your analysis. What do you think happens next? You guessed it; you miss out on a potentially great opportunity. The cost of not knowing these key pieces of information is that you’ll take longer to assess potential deals and ultimately miss out on an ideal property to a competitor who is better equipped.

In addition to being able to make decisions faster, having this knowledge will serve you greatly when interacting with sellers, buyers, lenders, contractors, and others. Not only can you keep up with the conversation, but it also shows the other party that you take what you do seriously. Knowledge is your greatest weapon in this business.

A few key metrics that you should know include:
  • Market Inventory
  • Average Days on Market
  • Median Sale Price
  • Foreclosure Rate
  • Zoning Laws
Market InventoryMarket inventory refers to the number of houses that are listed for sale at a given time. These listings are typically found on the Multiple Listing Service (MLS) and do not include properties that are listed for sale by owners (FSBO). The market inventory of a specific area does not remain the same; it changes over time.Seller’s Market: A seller’s market is when there are more buyers seeking to purchase properties than there are available homes for sale. This is advantageous to the individual selling their house because they’re more likely to receive the amount they asked for or an offer that is higher than their asking price.Buyer’s Market: A buyer’s market is when there are more homes available for sale than there are people looking to buy. This situation is ideal for an individual looking to purchase a house because they stand a better chance of buying a home at a lower cost than usual.As an investor, knowing whether or not the area you're focusing on is a buyer's or seller's market really just makes you aware of where most of your energy will be spent. By that I mean that is you're in a buyer's market the bulk of your energy will not be spent trying to acquire a property, but rather trying to get the property to sell once you've renovated it. Likewise, in a seller's market, you will spend a majority of your efforts trying to find a property to purchase.Average Days On MarketThis points to the median number of days that a property remains on the market before it goes under contract or it is pending sale. When a house is listed and placed on the market, the seller usually hopes that it will sell quickly. It is important to know the average days a property spends on the market because, the longer the house remains on the market, the less likely it is to be sold for its asking price. This can place a buyer at an advantage because the seller might be more willing to accept a lower price point than what they initially requested.This number will also play a significant role in the offers that you make. If you plan on rehabbing the property and placing it back on the market for sale later, it will help you to determine how long you may have to hold the property. When crunching your numbers and doing your due diligence for your investments you will need to factor in the time and cost associated with holding the property.Median Sale PriceEvery neighborhood is comprised of homes with different price points. The median sale price is the middle or average price of a property in a given neighborhood or zip code. Your local board of realtors usually tracks this number on a quarterly basis. Knowing the median sale price is essential when it comes to making offers, or when deciding how much you can sell your redeveloped property for once it gets back on the market (aka the After Repair Value). You can find this information on websites such as Zillow or Trulia.
Foreclosure Rate
The foreclosure rate is determined by the number of foreclosure filings in a given area divided by the total number of homes in that area. The higher the foreclosure rate is, the more likely it is that the property values in that location will decrease over time. Depending on the area, the foreclosure rate is released either monthly or quarterly.

Zoning Laws
Zoning refers to local laws or regulations that stipulate how property can or cannot be used in a certain geographic area. A zone is often identified as residential, commercial, industrial, or recreational. Zoning laws often change over time with the growth or development of a city and determine whether existing structures can be added on to or replaced with something new altogether. An example of this would be, the ability to convert a residential property to a commercial property. Another example is being able to add an additional level to a single-family house.

As I mentioned before, zoning laws change, so it’s vital that you keep up with these changes as they occur. Being able to anticipate upcoming changes in your market can help you to focus your investing efforts better, as well as give you an advantage by being one of the first to know. The faster you are able to take action, the better you position yourself to benefit from potential deals ahead of your competitors.

  • Tip: Buy a zoning map of your market and get to know the different zones that exist, in addition to the regulations associated with that zone. Also, attend a local zoning meeting if you can.
Every deal that you analyze and every offer that you make will rely on these key pieces of information. The more you familiarize yourself with this data the more confident you’ll be in analyzing deals, submitting offers quickly, and discussing the real estate market with other interested parties.
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