When you buy or sell a property on your local market, you'll negotiate over a price estimate from a wide range of factors. One of the best ways to estimate the price of a house is to perform a comparative market analysis or CMA.
While this is just one of the tools that real estate agents or listing agents will use, it's vital to understand what a CMA is in real estate. Doing this will help you evaluate properties independently and ensure you get a fair price for your upcoming purchase or sale.
Not sure where to start? Let us break down what a CMA in real estate is in detail.
Comparative Market Analysis Explained
In short, a comparative market analysis is a means of estimating the price of a house by comparing it to similar and recently sold properties in its immediate proximity.
For instance, you might estimate the price for one house by seeing the sales prices of similar homes in the same neighborhood.
You can perform a comparative market analysis through several steps rather than a specific formula.
Because of this, it’s a convenient tool for professional real estate agents, listing agents, and average Americans looking to ensure they get a fair sale or purchase price for their properties.
You can perform your own comparative market analyses by researching comparable properties to the home you want to buy or sell on publicly available listing sites like realtor.com.
What Is a Comparative Market Analysis?
At its core, a comparative market analysis compares a given property, like a home you want to buy, against other homes that are similar in:
- Features and amenities
- Aesthetic style
By generating an accurate CMA, you’ll learn a home’s value (or likely valuation in the current market) as will be used by real estate professionals.
The most common type of comparative market analysis focuses on home appraisals in the same neighborhood.
For example, if you want to buy a house in a neighborhood with 10 other houses, you’ll do that analysis by looking at the sales prices for all those homes sold in the recent past.
A CMA can help sellers pick the best listing price ranges for their homes. Furthermore, a CMA can help home buyers avoid being scammed or paying higher-than-average prices for a property in a given area. It’s an excellent way to ensure that both parties discuss fair prices.
However, a CMA is just a price estimate based on comparable sales. It is not a perfect description of the right price for a house (which is subjective to some extent, anyway).
Since it is an estimate of the value of a home based on market trends, realtors and average Americans don't need to be licensed appraisers to perform comparative market analyses to determine fair market value.
Furthermore, a comparative market analysis does not look at home sales or purchase prices far in the distant past or by predicting potential home prices in the future.
For Best Results
Generally, a CMA is only effective if it has enough data on home sales within the past few months, including currently active listings. A CMA is much less effective if a property is by itself (i.e., not in the neighborhood but on a relatively isolated plot of land).
For the best results, you should only perform a CMA if you can follow the rule of three:
- There are at least three homes in the same area as the property you want to buy or sell.
- Those homes were sold within three to six months.
- The three homes on the local housing market are very similar or located closely together.
What’s Included in a CMA Report?
When determining an accurate price for a house, you should do a CMA report for at least three properties in the same area. That comprehensive report should include a wide range of factors, such as:
- Location. The best "comps" or comparable properties should be located in the same neighborhood as the subject property. If there aren't enough properties on the local real estate market, a realtor may choose comps in an area that are similar based on aesthetic, budget, or climate attributes.
- Lot size since the size of a given property’s lot can affect its asking price and overall market value.
- Total square footage for the same reasons (though the livable square footage is usually more critical than raw square footage).
- Property age and overall condition. Newer homes and homes with renovations are often more valuable and charge higher prices.
- The number of bedrooms and bathrooms a property has.
- Special property features like fireplaces, garages, basements, patios, swimming pools, and solar panels.
- Date of the last sale. Comps should usually have been sold within the previous three to six months.
- The financing terms, such as what financing a buyer may use to purchase a home and what buyer contingencies are expected to be present in the deal.
How To Do a Comparative Market Analysis
Now let’s break down how you can do a comparative market analysis.
Evaluate Nearby Homes
First, evaluate the neighborhood and any nearby, similar homes to the given property you want to buy or sell. This ensures you will set the right listing price or make a reasonable offer to a home seller.
Consider the neighborhood’s overall quality. If the area has very attractive blocks, ample community amenities, and a homeowner’s association, it’s likely worth more than a neighborhood with rundown or unattractive blocks and few community amenities.
Furthermore, you should consider factors like proximity to good schools and the curb appeal of similar properties. Imagine whether you would like to live in the neighborhood and let that influence your comparative market analysis.
Get Property Details
Next, you should get property details about the home in question to help you determine a reasonable selling price. If you are working with a real estate agent or broker, you can get the information from that party. Details that can affect property value should include:
- The size of the home in terms of square footage (and livable square footage specifically)
- The age of the home
- The construction and layout of the home
- The home’s condition
- Any finishes or landscaping touches, as well as any upgrades or updates in the recent past
Be sure the property details are accurate, and take a tour of the home, if possible, to confirm those facts. You can also go to your county’s property appraiser website and search the property by address, owner name, or folio number to confirm details like year built, sale history, square footage, and more.
Choose Comparable Homes
Then you need to select your comps. These are three to five comparable homes in the same area sold between three and six months ago (the more recently they were sold, the better). Your comps should be within one mile or so of the property and be in the same school district.
Don’t forget to choose similar comps regarding square footage, bedrooms and bathrooms, and construction style. The more similar your comps are to the subject property, the more accurate your comparative market analysis will be. You can leverage sites like Zillow to quickly search recently sold homes in the area.
Adjust for Property Differences
You’ll also have to adjust for property differences, as no two houses are alike. You can work with a real estate agent or broker on this step if necessary. Get the property information of each of your comps (as detailed as possible) and compare:
- The square footage differences. If the subject property, for instance, is smaller than all of your comps, it’s probably worth a little less than those comps
- The feature differences, such as the number of bathrooms the properties have
Note that homes can have superior and inferior factors relative to each other.
For instance, if the subject property is smaller than a comparable property but has an extra bedroom, it may be worth more than the comparable property, even if it doesn't have as much livable square footage.
Some of this is necessarily subjective, so it’s crucial to hire a realtor or real estate agent so they can give you their professional opinion on the analysis.
Determine Price per Square Foot
At this stage, you can determine the price per square foot for the property after making the above adjustments. To do this:
- Divide the adjusted price of each comp property by each square footage. This will give you the sold price per square foot
- Then add the sold price per square foot of all the comparable properties together
- Divide that by the number of comps to get the average price per square foot
- Once you have that, simply multiply that average square footage number by the square feet of the subject property, and you’ll have an estimated price.
A comparative market analysis is just one way to estimate the price of a home, whether you are buying or selling the property. It’s also an excellent way to determine how much you need to take out with a loan if you require financing to purchase the home of your dreams.
Vaster can help with the second part. Our knowledgeable loan officers are well-equipped and ready to help you find the right financing solution for your needs in no time.
Contact us today or schedule an in-person consultation with a Vaster loan specialist.
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