One of the hardest parts about buying or selling a property is figuring out how much to offer or ask – but don’t worry, a real estate comparative market analysis can help!
Pricing property is a science regardless of how subjective it may seem.
Conducting a comparative market analysis (CMA) is one tool that can help you determine what to do in this situation.
Keep reading to find out all you need to know about this process.
1. What is a comparative market analysis (CMA) in real estate?
A comparative market analysis is a tool that real estate agents use to estimate the value of a specific property by evaluating similar ones that have recently sold in the same area.
As it can be extremely challenging to reliably estimate the fair market value of a property, this is helpful in determining how much a specific property is worth.
2. Why is it so hard to estimate the fair market value of a property?
It can be hard to estimate the fair market value of a property because there are a significant number of factors that go into determining how much a specific property is worth.
For instance, when people go to price their property, they often consider the location, square footage, and property characteristics.
However, these aren’t the only factors that impact the price.
Any improvement’s age, condition, features, lot size, condition of the local and national markets, etc. affect the value of residential real estate as well.
3. How is a comparative market analysis prepared?
To prepare a CMA, agents search for properties recently sold in the same area that are as similar to the subject property as possible.
These properties are known as comparable sales, or comps, and are used to conduct a sales comparison approach to pricing.
This approach operates under the assumption that you can figure out how much a property is worth by identifying how much it would cost to purchase a similar property of equal desirability.
Here’s how they do this:
The Rule of Three
An agent’s first step in creating a CMA is finding three properties that have recently sold in the area.
While the past 6 months is acceptable, 3 months is preferred.
These three properties should be similar and located as close together as possible.
Once these comps are selected, the agent should examine how they differ from the property in question.
Itemize and price out the differences, and then adjust the sales price of each comp to determine how much it would cost if it were nearly identical to the subject property and sold in the current market.
Technical Knowledge
As you read through this information, you may recognize that a comparative market analysis uses market indicators to compare and identify regional property values.
This is just like an official appraisal.
However, it’s not an official appraisal.
Appraisals are conducted by appraisers whereas CMAs are completed by licensed real estate professionals to estimate the fair market value.
A CMA is ultimately a complex process, and it requires technical knowledge of the overall market and how various aspects of real estate impact how much a property is worth.
To prepare a CMA, you need this technical knowledge!
Market Conditions
Market conditions must be considered when creating a comparative market analysis (and price setting).
Therefore, it’s best to use properties that are being sold close to the property that is being priced.
For instance, a strong buyer’s or seller’s market can upend CMA values and deeply affect the price being set.
You would see this in a rapidly gentrifying neighborhood.
There wouldn’t be strong comps because property prices can change dramatically within just a few months.
Or if you’re looking for a property in a rapidly appreciating neighborhood, then you’ll want to remember that buyers and sellers may come to an agreement on a price that is higher than the market estimation; however, in order to get financing, an appraisal will be needed to determine if that pricing is justified.
4. What’s included in a comparative market analysis?
Completing a CMA can be a complicated process.
However, if you break it down into separate, manageable parts, then it becomes more digestible.
Use the following list of components when you build your analysis.
Location: The best comps are located in the same neighborhood as the subject property.
If there hasn’t been a lot of recent sales in the area, then select comps located in an area that is considered similar due to school quality, crime rate, noise level, proximity to amenities, etc.
Lot size: The size of a property’s lot plays a large role in its market value.
Even half an acre can make a substantial difference in a property’s price.
Square footage: The larger the property, the more valuable it tends to be on the market.
Age and condition of the property: The year any improvements were built and whether they were recently renovated factors into their value.
Newer constructions and homes built with high-end materials are often considered more valuable.
However, historical homes that have been recently updated can also have high purchasing prices.
Number of bedrooms and bathrooms: Similar to square footage, the more bedrooms and bathrooms a home has, the higher its value will be.
Special features: Some specialty features can significantly impact the value of the property.
For instance, fireplaces, patios, swimming pools, garages, finished basements, etc. can help boost your home’s value.
However, it’s important to keep the local market in mind.
Not all these special features will actually increase the value of your property.
Date of sale: When choosing a comp for a specific property, it should ideally have been sold within the last 3-6 months.
If sale dates are not current, then prices must be adjusted to reflect how the market has changed.
Market conditions can fluctuate both locally and nationally based on the size of inventory and changing interest rates.
Terms of financing and sale: the type of financing that a buyer uses to purchase a property can impact the purchase price.
Terms of sale can do the same.
Buyer contingencies might be accepted as well, but only if the offer price is higher.
If a comp’s sale included seller concessions, then the value of the concessions must be contracted from its purchasing price.
These concessions may consist of the seller’s decision to pay the buyer’s closing costs or to make repairs on the home before the sale.
5. How do you do a comparative market analysis?
If you’re still a bit confused about the step-by-step about how to prepare a CMA, use the list below to create an accurate analysis.
Evaluate the neighborhood
To set an accurate listing price, the CMA should take into consideration the general quality of the neighborhood.
So, as you begin to prepare a CMA, take note of the more attractive blocks, where the community amenities and nuisances are, and what the HOA rules are.
Check how the schools are and whether there are any issues with curb appeals.
This is all valuable information as you begin to evaluate the value in your area.
Gather details about the subject property
As a real estate agent or broker preparing a CMA, you’ll review the existing listing (if there is one) and make an in-person visit to the subject property.
This will allow you to gather information about the property in question.
You should look for the home’s size (livable space), age, style, construction, condition, layout, finishes, landscaping, and upgrades/updates in particular.
Select comps
Selecting comps is an important part of the comparative market analysis process.
These are 3 to 5 properties in the area that have sold recently and are as close to the subject property as possible.
Ideally, these properties are within one mile of the subject property and in the same school district.
Here are some of the criteria that should be the same or similar between your subject property and your comps:
- Square footage
- Lot size
- Bedrooms
- Bathrooms
- Type of construction
- Location (i.e., if your property has a unique amenity like a golf course or a waterfront area then the comps should have the same placement)
You should also keep in mind when the property was sold.
The more recently the property was sold the better comparison it is for you.
This is because real estate prices fluctuate rapidly, and a lot of factors will impact them.
Adjust for differences
While you may find some good comps, you’re unlikely to find identical properties.
As a result, you’ll need to adjust for differences between the subject property and your selected comps.
An experienced real estate agent or broker is the best person to perform this step.
They’ll be able to assign a value to each of the differences and adjust the value of each comp accordingly.
We’ll talk more about this in the next section (example of a CMA).
This step is essential in taking an apple to orange comparison to a more equal apple to apple comparison.
Determine the sold price per square foot after adjustments
Once you’ve adjusted for differences, divide the adjusted price of each comp by its square footage to determine the sold price per square foot.
Then, you’ll add the sold price per square foot of all the comps and divide the number of comps to get the average.
Finally, multiple the average by the square feet of the subject property to find its current market value.
6. What’s an example of a comparative market analysis?
Here’s a simplified version of a comparative market analysis that could help a buyer.
Say, for instance, that a couple is interested in purchasing a single-family home that’s listed for $450,000, but they want to negotiate the asking price.
Having their real estate agent run a comparative market analysis on the home can help them come up with a competitive offer based on current market trends.
The agent will begin by gathering information on the property that the couple wants to purchase.
They find out that:
The property is located on a half-acre lot in a subdivision that’s filled with houses that were all built around the same time
All the houses in the subdivision have similar floor plans
The house in question has three bedrooms, two full bathrooms, and one half-bath
The house has a fireplace in the living room and a two-car garage
The house has 2,000 square feet, is in good condition, and does not require any major repairs
The house, unlike others in the neighborhood, has a finished basement
After obtaining this information, the agent searches for comps in this area.
The subdivision is not only large, but has also seen a lot of activity, so there are three comparable properties that have been sold in the last 6 months.
The agent begins to put together a comparative market analysis, which gives the potential buyers a lot of good information.
The comparative market analysis first lists out the differences between the subject property and comps.
The price is then adjusted.
More desirable features are deducted from the sales price of the comp, and less desirable features are added to it.
Finally, total adjustments are calculated for each comp, and the sales prices are adjusted accordingly.
At the end of this analysis, the comps will show a range of what the adjusted sales price should fall in.
The agent uses this price range to determine what price the couple should offer for the subject property.
7. How do you know if you need a comparative market analysis?
As noted above, a CMA is a helpful tool used in real estate.
You may find yourself in need of a CMA if you’re a property owner interested in listing a property for sale.
It can help you determine the appropriate asking price based on what other similar properties in your area have received on the market.
It can also help you in negotiating asking prices and coming up with competitive offers if you’re ready to purchase a new property.
Final thoughts
Have you been trying to purchase a property in a seller’s market?
If so, you know it’s been a tough time for buyers!
Conducting a comparative market analysis will help you understand what a property is really worth, even when that can be difficult to calculate.
Just remember to find comps in the area that are most similar to the property you’re attempting to buy.
They should be recently sold and ones with the fewest adjustments required.
Working with a licensed real estate agent or broker is helpful during this process.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.