Compiling A Basic Property Marketplace Analysis

By on July 5, 2014

If you are lucky enough, there will be a data aggregator that has all the information you need  about the particular neighbourhood area you are interested in. It will save you a lot of time and effort by just paying these guys to get your hands on the information you are looking for. But if there is no service provider that is doing this, it’s time to clear your desk and start doing what you are supposed to do as a serious investor. Time to get your hands dirty.

Area segmentation

Although most people and so-called experts talk about the real estate market in a macro perspective, you must surely know that micro factors can make macro statistics look like a very bad joke. Don’t confuse yourself. The big picture view can tell you a lot about how a market is performing. But you must admit that even during economic booms, there are always areas that are not performing as well as the market. And when markets are going through a down period, there will still be niche areas experiencing unprecedented growth.

The best way to segment up markets is to obtain data that are able to show geographic details of transactions being made. For segmenting your marketplace by area, all the data in the world would be useless if it does not tag each transaction to a particular geographic area. Sometimes, you will find them tagged to names of neighbourhoods or even by postal codes. If you are unable to compile that information from your own sources, the next best place to find such details is the property listing page of newspapers and online listing portals.

Check out the supply

Demand is more of an intangible force that is difficult to pin-point. However, supply is something that can be worked out with a certain degree of certainty. You need to know the inventory level as it is a direct factor that affects your investment scope. In most markets, at least 50% of the supply will eventually sell within a reasonable amount of time. Do take note of the law of percentages. Because the lower the supply happens to be, the bigger the impact each sale unit will affect the sales percentages.

Process of closing

Look at properties that pending transactions. This refers to homes that are in the process of ownership transfer or closing which takes about 30 to 60 days. It will only be a closed transaction after the money is accounted for and the legality of ownership is completed. If you only read up closed transactions, you are in effect looking at market conditions 30 to 60 days ago. So if you want a more current picture of the market, you will want to refer to transactions that fall within the “process of closing”.

Absorption rate

Having a rough idea of the supply level in the market is just the job half-done. The other half, which is more critical, is how long houses go on sale before finally finding a buyer. If you take the level of available inventory you have worked out earlier and divided that by the number of pending properties, you will end up with an average of how many months worth of property supply is available for sale in the market you are researching on. This gives you an overview of what is happening with demand and supply factors.

For example, if there are 300 homes available for sale in the particular area you have segmented, and 60 transactions are in the process of closing, you divide 300 by 60 and you get the number 5. This means that there are 5 months worth of property inventory in the marketplace. This of course, does not take into account the listings that pop up after your analysis. Remember that you are using these numbers to draw up a market analysis. There are sure to be variances to the real exact numbers. But this is usually good enough for an investors to make an assessment and come to a judgement.

The smaller the resulting number means a quicker appreciation, a sellers market, a faster listing-to-sale duration, etc. Agents will also be more focused on volume rather than higher commissions. This will allow you to more easily negotiate for a smaller commission package. Don’t start investing in real estate before working out your numbers.



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