Performing Market Analysis

Market Analysis Basics

The market analysis process is how you will determine how much you think you can sell the property for. Once you have determined that amount, you can decide how much you are willing to bid on a property at auction.
You will want to have a formula for determining how much you are willing to bid. A simple one would be:
How much you think can sell the property for- (minus) your minimum profit margin- (minus) your margin of error
Your maximum bid
If you want to be conservative, determine the low side of the value range in which you think you can sell the property.
You always want to have a minimum profit margin and a margin of error built in to your formula. This is because without a profit margin, you aren’t making money, and without a margin of error, you don’t allow for anything to go wrong. What if your research wasn’t exactly accurate (hey, we all make mistakes, right)? And what if everything doesn’t go exactly as you had planned?
The 50% Rule:John Beck likes to use the 50% rule. This just means that he is willing to pay 50% of what he can sell the property for. For example, if his market analysis determines that he can sell a property for $2,000, he will pay up to $1,000 as a maximum bid.
This formula takes into account the profit margin and margin of error. If you are extremely confident in your market analysis, you may go a little over the 50% rule or if you are unsure in a particular area, you may go less than 50%.
You can change your maximum bid as you get more information about a property, but once you get to the auction, I suggest that you stick with what you have determined. There are two main reasons for this:
You don’t know how high the guy bidding against you is willing to go. It might be $5 over your maximum bid or it might be $10,000 more. You won’t know unless you engage in a bidding war.
Whenever you bid more than what you had established as your maximum bid, you are either eating into your profit margin or your margin of error, neither of which is good!
As you get more and more comfortable with the market analysis process, your ability to determine how much a property can sell for will get better and better. This will help you be more confident that you are getting only the properties that can be sold for a profit.
How much can the property be sold for?
To answer this question, you will want to keep several things in mind.
You should have the assessed value and the fair market value of the property from the county assessor’s office. You can get this from the county itself, or it may be available on the following website:
http://publicrecords.netronline.com/
To get the assessed value, click on the state you want.Then, click on the county you want.Click on “Go to Data Online” for the County Assessor, if it is available. If not, use the phone number provided, and ask how you can access the county’s records on property.If you need to call the county, have them look up a few properties at a time, and within a few days you will have them all done.
If you only have the assessed value, find out how the assessed value is determined. For example, in some states, the assessed value is the same as what the county considers to be the fair market value. In other states, the assessed value may be a percentage of fair market value:
Michigan’s Constitution says that the assessed value cannot be more than 50% of the fair market value.
In Arkansas, the assessed value is equal to 20% of fair market value.
Where I live, the assessed value is 55% of market value for residential properties and 100% of market value for commercial properties.
This should help you know what the county thinks the fair market value of the property is. However, this is just a starting point. I never completely trust the county’s assessment nor do I use that as the only method of determining the property’s value.
2) You can find out in many cases from the county recorder’s office what the property has sold for in the past. If you know what it has sold for in the past and you know the market trends in the area since those past sales, it might give you an even more accurate indication of what the property might be worth.
3) You may also be able to find out from the county recorder’s office what other surrounding properties have sold for in the past. Sometimes these will even be more recent sales. And if the properties are similar, it can give you a good idea of what the property might sell for.
The above information is helpful in determining a property value. But usually the most accurate measure of how much a property can sell for is finding comparable sales.
4) You will want to find several “comparable sales” in the area from other sources. Comparable sales are properties that are similar to the one you are researching that have sold in the area within the last 6 months (or 12 months if there aren’t very many within 6 months). You will want to find out what these properties sold for and under what conditions. For example, was it a normal sales transaction, or was the property foreclosed on and sold at auction? Was the seller under some sort of distress (about to be foreclosed on, being transferred to a different part of the country for a job and needed to sell quickly, etc.) and therefore more motivated to sell than a normal person would be? Knowing this will help you determine if it is truly representative of what the property you are researching might sell for.
Your resources for finding comparable sales will be different if you are researching a home versus if you are researching raw land. These will be discussed in two separate additional modules.
You will want to find out how much can the property be sold for through each available selling method.
You may find that you can sell a property for more money through one method than through another. In order to determine this, you will need to research the market value through each method (through a Realtor, For Sale By Owner, through an online auction, or another method you are considering). For example, you may find that you can sell a property for twice as much by using a Realtor than you could through an online auction. In this case, you should if the length of time required to sell it through that method is acceptable to you. Once you have determined which sales method will yield the best profit in an acceptable time frame, you will determine the maximum bid you will place at the auction based on what you can sell the property for through your chosen sales method.
All of the information you obtain about a property through both the Screening Process and through Market Analysis will help you determine whether or not a property will be profitable if you decide to obtain it through a tax sale.