One of the most important things to master when analyzing a property and performing due diligence is to accurately determine its after repair value. The best way to do this (with houses at least) is a comparative market analysis. What Is a Comparative Market Analysis? A comparative market analysis (CMA) is just what it sounds like. It looks at similar nearby properties that have sold recently and compares their sale prices to that of the subject property. Below are “want” vs. “need” criteria for determining what should qualify as comparable properties (aka comps): Of course, nothing is ever 100 percent in real estate. Analysis is as much an art as a science. So, for example, if you are looking at a rural property, there may not be any good comps within a mile or so that sold in the last year. You may have to look farther away. Perhaps you’re looking at one very big house in a neighborhood that has almost only small houses. You may have to compare properties that are smaller and make bigger adjustments. Or perhaps you are looking at a house where every comparable is a foreclosed property in terrible condition, and your property is the exception. This stuff happens. In some ways, it can actually be an advantage. Think of it this way: the more “cookie cutter” a property is, the harder it is to negotiate on price because the value of the property is obvious. That being said, every analysis should result in both one expected price, as well as a potential price range. For instance, let’s say you estimate the value to be $95,000, with a high end of $100,000 and a low end of $90,000. Or, if the comps are really bad, you can’t be as sure, so the range should be even wider. In this instance, it would be safer to say between $80,000 and $110,000. Keep in mind that a wider range means more risk. Thus, you’ll want a bigger margin. Also, remember that if all the comps are foreclosures, that means there is likely no homeowner market in that area. Therefore, you’ll probably only be able to sell to other investors or to set up an owner financed deal. Related: How to Determine Value on a Property By Adjusting Values on Comps How to Find Comps Once you have a subject property, you should set out to find comps. The easiest method is to use the MLS, but unfortunately you have to be a real estate agent to gain access to it (or have an agent put together an analysis for you). Luckily there are several other websites you can use—although it’s harder to specify exactly what characteristics you are looking for. When using these sites, you’ll need to do a little more legwork. You can find comps without having a real estate license on websites such as: Zillow.com Redfin.com Eppraisal.com Trulia.com Realtor.com Just make sure not to rely on the Zestimate or Redfin estimate; they are simply not accurate. Instead, find actual comps, and put together your own estimate. Below I'm going to show some stills from the MLS that my real estate agent provided when analyzing a house we just bought. Here are some characteristics of the home: 2 bedrooms 1 bathroom 773 square feet Built in 1940 Crawlspace No garage So, to qualify as a good comp, we’re looking for properties with the following characteristics: Status: Active, Pending, Show for Backups (similar to Pending), Sold I’m not very interested in properties that were withdrawn or cancelled, as their list prices could be completely unrealistic. And the most important category to look at, by far, is “sold.” Sold Date: 9 months to present We’ll split the difference between six months (what I want) and 12 months (what I need). Bedrooms: 2 In this case, there are enough two-bedroom houses nearby to compare to. In addition, the difference between two-bedroom and three-bedroom houses is bigger than between three and four or four and five. This is because a three-bedroom is usually the smallest any family will consider. Thus, anything less than a three-bedroom house will usually have more transient tenants or will garner less interest from potential homebuyers. Bathrooms: 1 Same as above. Age: 50-75 years and 76-100 years This house is 79 years old, so the above range gives me everything within about 20 years in either direction. Here are the aforementioned screenshots from my agent of what the search criteria look like on the MLS: Again, you need to be a real estate agent to access the MLS, but alternatively, you can ask your agent to search for properties for you based on certain characteristics. Next, check a map for nearby properties that fit your criteria: Now, some investors and agents only consider those properties within a half-mile to one-mile radius of the subject property (the red house on the map above). I am not a fan of this approach, as neighborhoods can change drastically in a short space. This is especially true when you cross major dividing lines, such as Highway 35 on the map above. “The other side of the tracks” is an idiom for a reason. So, if you can stick to the same subdivision or group of blocks, that is preferable. In this case, the closest properties are the best comps. But I’m more interested in the comps to the south of the subject property than those the same distance away to the west, because the ones to the west are on “the other side” of Highway 35. You should also do an area analysis to make sure the zones in question are similar enough to each other for the comps to be useful. For example, I consider a section like the one below when conducting comparisons: While I’ll consider all the comps in that shaded area, the few next door are the ones I care about most. Defining perimeters in this way shoots out a list of properties that you can compare in different views on the MLS. I personally like to export them into Excel. And sometimes I will have to look up certain information (like square footage) on the county website if it’s not in the listing in order to fill out every cell. I also look at the pictures and listing description to get an idea of the property’s condition. (Hint: If there aren’t any pictures, it almost certainly means the property is in bad shape.) In this case, here’s the spreadsheet I created: Then, I go through each comp and determine if it’s a good comparable or a bad one. It’s important to remember that I’m comparing these properties to what the subject property will be worth when it’s fully repaired—not what it’s worth in its current state. Related: The Investor’s Guide to Pulling Realistic Rental Comps Good Comps vs. Bad Comps Here’s my analysis of each property listed above and the justification for deeming it a good or bad comp: Wheeling: Bad Only 558 sq. ft., so over 200 sq. ft. smaller 44th: Good 80 sq. ft. bigger, similar condition 45th: Good 60 sq. ft. bigger, garage but similar condition Wheeling: Bad REO—never compare a property to a foreclosed property, as they sell for less and are almost always in bad shape White: Bad Pictures look bad, listing says “fixer upper” 45th: Good 90 sq. ft. bigger, similar condition Lister: Good 50 sq. ft. bigger, similar condition Wheeling: Good 25 sq. ft. bigger, 2-car garage but similar condition 48th: Good (but barely) 150 sq. ft. bigger, similar condition 46th: Bad (but close) 90 sq. ft. bigger, substantially nicer 44th: Bad Much, much nicer 46th: Bad 500 sq. ft. bigger, nicer 49th: Bad 900 sq. ft. bigger, much nicer At this point, I have six good comps. The four I’m most interested in, however, are the four sold. How to Adjust Values on Comps Next, we want to turn these houses into an exact replica of our subject property. So, if the property is nicer or better than ours, we reduce its sold price. Why? Because, presumably, if it didn’t have the feature our subject property lacks, it would have sold for less. The opposite calculation would apply if our property has features the comp does not. For example, one of the properties on 45th has window A/C units, but our property will have central air. I will then add $2,500 to 45th’s sale price as an adjustment to what it would have sold for (at least what I think it would have sold for) if it had central A/C. But how much should these adjustments be? Unfortunately, there’s no magic formula. The best explanation I’ve seen was in the Sacramento Appraisal Blog: “Compare houses in a neighborhood to determine the adjustment. Or in other words, find matched paired sales to discover what buyers are willing to pay for a certain feature. For instance, if you find a house that sold at $230,000 at 1,700 sq. ft., but a very similar house sold at $220,000 at 1,500 sq. ft., that tells us the market paid an extra $10,000 for 200 extra square feet. In this case the adjustment for square footage would be $50 per sq. ft. since $10,000 divided by 200 equals $50 per sq. ft. Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free “This is just one example though. It’s important to find several other matched pairs so you can make a reasonable judgement about what the market is willing to pay for extra square footage.” Again, it’s not going to be perfect. The goal is simply to be very close. Let’s walk through the 45th property together. 45th Sale Price: $84,900 Subject / 45th / Adjustment: Beds: 2 / 2/ $0 Baths: 1 / 1 / $0 Sq. Ft: 773 / 864 / -$5,000 Condition: Good / Fair / +$5,000 Basement: No / Yes / -$2,500 Garage: No / No / $0 Sale Date: 3-15-2019 / 8-23-2018 / +$2,500 (the market appreciated in the interim) HVAC: Central / Window / +$2,500 Sum: +$2,500 Adjusted Price: $87,400 I should also note: look out for seller concessions. Oftentimes, the seller will make a concession of a few thousand dollars, usually to help the buyer with financing. If such a concession exists, it will not be taken out of the sold price but will simply be noted at the bottom of the listing. Subtract that amount from the sale price. Here’s my breakdown for each of the four sold comps: My four adjusted values are: 45th: $87,400 Lister: $95,000 Wheeling: $80,500 48th: $94,000 Average: $89,225 In addition, I looked at price per square foot and compared that to my subject property: 45th: $98.26 Lister: $109.22 Wheeling: $112.50 48th: $101.97 Average: $105.49 At $105.49, the subject property would be worth $81,544. (Here’s my math: 773 x $105.49 = $81,544.) From this analysis, I would garner the property is probably worth between $80,000 and $95,000, with the sale price likely falling between $85,000 and $90,000. If I was selling it, I might list it at $94,900 just to see if that would elicit an offer, but I would expect it to sell for a bit under $90,000. Professional CMAs and Appraisals Of course, you can also ask your real estate agent to put together a CMA, which will have all sorts of information, including side-by-side comparisons and fancy charts. Here are a couple examples: Just make sure your agent performs the analysis as I described above. Fancy charts are nice and all, but "garbage in equals garbage out" in terms of data. And don't waste an agent's time by requesting one CMA after another on properties you aren't very serious about. Indeed, brokers will often charge for detailed CMAs (where they do site visits) called broker price opinions (BPOs), so they'll quickly grow tired of running free comps for you if you don't buy anything. Finally, you can get an actual appraisal—and will need to if financing is involved. Usually, an appraiser will select three comps to analyze. Personally, I like to select as many as I believe are good (although I rarely go above five or six). But here is what a sample appraisal looks like: This is just the first of two pages of adjustments. In case you are wondering, the value this appraiser arrived at for the subject property was $85,000. Conclusion Entrepreneurs aren’t necessarily number crunchers. But “running the numbers” is a critical skill to master if you want to be successful in real estate. When it comes to comparing properties and determining values, it’s vitally important to think like an appraiser. This is not only essential when identifying good comps or performing due diligence, but also when making appropriate adjustments and landing on a realistic estimate of value. You can’t make good decisions without good numbers! So it’s important to put in the work required to get there. Do you have any questions about comps, appraisals, the MLS, or anything else? Leave a comment below.