Essential Market Concepts
Master the key terms and metrics used in real estate market analysis. These concepts are fundamental for agents, investors, and informed buyers.
DOM is a critical metric for understanding market conditions and pricing strategy. Lower DOM indicates a hot market or well-priced property; higher DOM may suggest overpricing or reduced demand.
Key considerations: - Cumulative DOM (CDOM) tracks total days including relists - Average DOM varies significantly by market and price point - Properties often see less interest after 30-60 days - Fresh listings (low DOM) often attract more attention
Current Date - Listing Date = DOM
Cap rate is the most common metric for evaluating income-producing properties. It expresses the relationship between a property's net operating income (NOI) and its value or sale price.
Key considerations: - Higher cap rate = higher risk, potentially higher return - Lower cap rate = lower risk, more stable investment - Cap rates vary by property type and location - Useful for comparing similar investment properties
Cap Rate = Net Operating Income (NOI) / Property Value × 100
Example: A property generating $50,000 NOI selling for $625,000 has a cap rate of 8% ($50,000 ÷ $625,000 = 0.08)
Escrow protects both buyers and sellers by ensuring all conditions are met before money and property change hands. The escrow agent (often a title company or attorney) acts as a neutral intermediary.
Escrow functions: - Holds earnest money deposit - Coordinates document collection - Ensures all contingencies are satisfied - Calculates prorations and credits - Disburses funds at closing
- Escrow opens when contract is signed and earnest money deposited
- Escrow officer/agent must be neutral to all parties
- Escrow instructions outline conditions for closing
- Escrow closes when all conditions are met and funds are disbursed
Contingencies protect buyers (and sometimes sellers) by allowing them to back out of a contract if certain conditions aren't met. Common contingencies include financing, inspection, appraisal, and the sale of the buyer's current home.
Common Types:
Financing Contingency: Buyer must obtain loan approval by specified date
Inspection Contingency: Buyer can inspect property and request repairs or cancel
Appraisal Contingency: Property must appraise at or above purchase price
Home Sale Contingency: Buyer must sell their existing home first
Title Contingency: Clear title must be delivered at closing
A CMA is prepared by real estate agents to help sellers price their property or buyers make offers. It analyzes comparable properties (comps) that have recently sold, are currently listed, or were listed but didn't sell.
CMA includes: - Recently sold properties (last 3-6 months) - Currently active listings (competition) - Expired/withdrawn listings (what didn't work) - Adjustments for differences in features
- Not an appraisal—agents cannot provide official valuations
- Best comps are similar in size, age, condition, and location
- Adjustments made for differences in features
- Market conditions affect interpretation
GRM provides a simple way to compare investment properties without calculating net operating income. While less precise than cap rate, it's useful for quick comparisons.
GRM = Property Price / Annual Gross Rent
Example: A property priced at $300,000 with $36,000 annual rent has a GRM of 8.33 ($300,000 ÷ $36,000)
- Lower GRM may indicate better value
- Doesn't account for expenses or vacancies
- Best for comparing similar property types
- Market-specific—GRMs vary by location
Absorption rate helps determine whether a market favors buyers or sellers. It's calculated by dividing the number of homes sold in a period by the number of homes available.
Absorption Rate = Homes Sold per Month / Total Available Inventory
Interpretation:
LTV is a key metric lenders use to assess risk. Higher LTV means more risk for the lender, often resulting in higher rates or PMI requirements.
LTV = Loan Amount / Appraised Value × 100
Example: A $240,000 loan on a $300,000 property = 80% LTV
- 80% LTV or lower typically avoids PMI
- Higher LTV = more risk for lender
- LTV affects interest rates offered
- Some loan programs allow higher LTV (96.5% for FHA)
Educational Content
This content is provided for educational purposes only and does not constitute professional advice. Rules and regulations vary by state. Consult with a licensed professional in your area for specific guidance.