Comparative Market Analysis: A Guide
VICTORIA ARAJ7-MINUTE READ
MARCH 31, 2023
When you’re in the market for a new home or looking to sell your current one, figuring out how much to offer or ask can be a considerable challenge. How much a house is worth can seem fairly subjective, considering how many factors go into determining it. However, pricing property is a science. That’s why real estate agents conduct a comparative market analysis (CMA).
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. It can be extremely challenging to reliably estimate the fair market value of a home because there are a significant number of factors that go into determining how much a specific property is worth.
When people who are buying a house or selling theirs think of factors that impact the listing price, they typically consider location, square footage and the number of bedrooms and bathrooms. But the property’s age, condition, features, lot size and so on, as well as the conditions of the local and national housing markets, affect the value of residential real estate as well.
How Is A Comparative Market Analysis Prepared?
In order to conduct the analysis, real estate agents search for recently sold homes in the same area that are as similar to the subject property as possible.
These homes, which are known as comps, or comparable sales, are used to conduct a sales comparison approach to pricing. This approach relies on the premise that you can figure out how much a home is worth by identifying how much it would cost to purchase a similar property of equal desirability.
The Rule Of Three
The first step for an agent preparing a CMA is to find three homes that have sold recently (within the past 6 months at most, but preferably 3 months). These three homes should be as similar and located as closely together as possible.
Once at least three comps are selected, each one is thoroughly examined to pinpoint how it differs from the home in question. After the differences are itemized and priced out, the sales price of each comp is adjusted to determine how much it would cost if it were nearly identical to the subject property and sold in the current market.
What’s The Difference Between A Comparative Market Analysis And An Appraisal?
Although a comparative market analysis uses similar housing market indicators to compare and identify regional home values, it’s not considered an official home appraisal. Whereas home appraisals are conducted by appraisers to create home valuations, CMAs are completed by licensed real estate professionals to estimate the fair market value.
Even though the resulting value is an approximation that also incorporates the goals of the seller or buyer of the property, a CMA is a complex process that requires technical knowledge of the overall market and how various aspects of real estate impact how much a property is worth.
Taking Market Conditions Into Account
Market conditions are a wild card with comparative market analysis and price setting in general. That’s why it’s best to use homes that have sold as close in time to the home currently being priced. A strong buyer’s or seller’s market might upend CMA values.
For example, a rapidly gentrifying neighborhood might not have strong comparable properties because housing prices can change dramatically within just a few months. If you’re looking for a home in a rapidly appreciating neighborhood, just remember that even though buyers and sellers may come to an agreement on price, in order to get financing, a home appraisal will be needed to determine if that price is justified.
What Goes Into A Comparative Market Analysis?
Although completing a comparative market analysis is a complex process, it’s broken down into separate, manageable parts. These parts collectively give sellers and buyers a thorough value estimate.
Analysis begins with agents compiling a list of at least three similar properties within the same area that have sold in the last 3 – 6 months. If there isn’t enough sales data or if the potential purchasing price of a home is being calculated, agents may also select properties that are currently listed on the market or pending. Even expired listings can be used to demonstrate the kinds of prices that are too high to attract interested buyers.
Here’s a list of the various components that go into a CMA:
- Location: The best comps will be located in the same neighborhood as the subject property. However, if there haven’t been enough recent sales in the area to complete the CMA, the agent will select comps located in an area that is considered similar due to the quality of local schools, crime rate, noise level, proximity to amenities and so on.
- Lot size: The size of a property’s lot plays a large role in its market value. Differences in even half an acre can have a substantial impact on a home’s price.
- Square footage: The larger the house, the more valuable it tends to be. Therefore, the extent of livable square footage can be just as important as the number of rooms within the home.
- Age and condition of property: The year the house was built and whether it’s been recently renovated factors into the value. Newer constructions and homes built with high-end materials are often considered more valuable, though historical homes that have been recently updated can also have high purchasing prices.
- Number of bedrooms and bathrooms: The more bedrooms and bathrooms a home has, the higher its value will be.
- Special features: Specialty features, like fireplaces, patios, swimming pools, garages, finished basements and so on are also taken into consideration. However, it’s important to keep in mind that depending on the local market, not all special features will actually be viewed as increasing the home’s value.
- Date of sale: The comps chosen should have sold within the last 3 – 6 months. If sale dates are not current, sales prices must be adjusted to reflect how the market has changed. Market conditions may vacillate either locally or nationally based on the size of inventory and changing interest rates.
- Terms of financing and sale: The type of financing a buyer uses to purchase a home can impact the purchasing price, as can the terms of sale. Buyer contingencies might be accepted, but only if the offer price is higher. If a comp’s sale included seller concessions, the value of the concessions must be subtracted from its purchasing price. Such concessions may consist of the seller’s decision to pay the buyer’s closing costs or make repairs on the home prior to sale.