There is a lot of data about real estate for specific areas that if read correctly can greatly aid you. The only problem is that a person practically needs a major in economics in order to decipher this data. That is why I have decided to show how to read this data in a series of articles.
In this first article, I have decided to explain the difference between average sales price and median sales price. These terms are deceptive, because most people think that they are the same thing, and get confused when they discover that this is not the case.
The average sales price is equal to the total of all the prices in the entire area divided by the number of houses. This sounds complicated, but it is really quite simple. It is just the average of the selling prices of all the houses in the area. Here is an example to help you. There are five houses sold in an area for $500k, $430k, $470k, $700k, and $600k. The total is $2,700k, so we divide by five to get the average, $540k.
The median sales price means something quite different. The median is the middle (center) number of a list that is sorted from lowest to highest. So the median of our same example above is $500k, since $500k is the middle number in the list $430k, $470k, $500k, $600k, and $700k. If the list has an even number of houses then the median is the average of the two middle terms. For example lets add one more home to the previous list. Our list is now $430k, $470k, $500k, $600k, $650k, and $700k. The median is $550k, since $550k is the average of $500k and $600k, the two middle numbers.
When one is dealing with housing statistics, there is usually a lot more on each list and the average and median are usually very different.
Now that you understand the difference between average and median, you might be wondering why these numbers matter. These numbers not only tell you about an area individually, together they tell you important information that many do not know and can help you get an edge.
When the average is larger than the median, it means that there are more houses in the area that are cheaper than average. When the average is smaller than the median, there are more houses in the area that are more expensive than average. The bigger the difference between average and median, the better or worse the area may be for investment.
This information is essential in a number of situations. If you desire to flip a house for profit, it would be best to flip a cheaper than average house in an area where the average sales price is smaller than the median sales price. This would mean that your cheap house would be in a good area, and would generate more profit from improving it.
We have taken our first step toward being able to read data about real estate and use this data to get an edge over our competition. We have learned the difference between average sales price and median sales price as well as how we can use this information to learn things about an area that your competition does not know.