If you’re a real estate investor, you’ll need to have a firm grip on the concept of comparative market analysis (CMA)—a critical pricing tool. What is it? Well, the meaning is right there in the phrase: A comparative market analysis assesses recently sold properties compare similarly to a "subject property” (in other words, the property you're buying or own). These properties are aptly called comparables, or “comps” or short.
Real estate agents put this analysis together for clients so that they can understand based on data (not emotion!) what an appropriate asking price might be (for sellers), or how much to offer on a home (for buyers looking to purchase). And buyers and real estate investors can do it for themselves with a bit of research.
A comparative market analysis considers factors like price per square foot, neighborhood, date built, and other home features.
Now, except in the cases of some tract housing—which may indeed have multiple properties with the exact same features—each property will typically be different from all others. Smart investors must understand how to account for these differences in order to determine the right listing or offering price.
Essentially, a comparative market analysis determines an educated property value for the subject property, much like an appraiser might do. However, with a comparative market analysis, said figure is derived from relevant data from similar homes.
How to perform a comparable market analysis
Expert real estate agents will be well aware of nuances to fine-tune their comparative market analysis. But even a novice investor can understand the broad strokes for an effective real estate market analysis.
Step 1: Get to know your subject property
To do a CMA, first take into account everything you know about the subject property. At the most basic level, you’ll need to know the location, the square footage, the number of bedrooms and the number of bathrooms, and the year the home was built. You’ll also want to know about any renovations and notable finishes, as well as special features like a swimming pool, view, or attached garage.
Step 2: Understand recent sales
From there, use the MLS, public information from the city assessor, or other sources like Zillow to pull data for a selection of sold properties—at least three—that most closely match your subject property, going back one year’s time. This may be easy to do in a large metropolitan market with lots of feasible comps, or harder in a smaller one, so you can extend your search back a bit further in that case. (When the time frame becomes much longer, it’s really a different market, so not a very useful comp.)
Keep in mind that you're not looking for active listings. Because these properties haven't yet sold, and you're not privy to ongoing negotiations, you can't know how the buyer and the seller determined a final sale price—or what that number is.
Step 3: Look for comparable properties
Take into account similar properties in the same neighborhood. When choosing comparable homes, consider matters besides just physical distance, such as attractiveness and busyness of the block, curb appeal, and access to a favorable school district.
Look for detailed information. You’ll want to compare homes of comparable size and floor plan, considering not just similar square footage but also layout, including the number of bedrooms and bathrooms. Compare homes on a similar lot size, too. Ideally you’ll stick to homes within a small square-footage range from your subject home, perhaps 100 square feet or so.
And you’ll also want to find comps where the age of the home is close to your subject home's—perhaps within a decade. So if your subject home was built in 1970, look for homes built in the range between 1960 and 1980.
Also consider homes of similar features, like that swimming pool or view we mentioned.
Step 4: Search for pricing trends
When you take into account all of these factors, you should see a through line suggesting a trend, which will help you determine your subject home’s value. Most of these homes should fall into a rough price range. By making some adjustments—like adding or subtracting money for a spare bathroom—you can determine an appropriate listing price or a fair offer.
Don't forget to consider condition
You can't compare a recently updated property to its straight-from-the-50s sibling—even if they have the same number of bedrooms and were built the same year. Keep condition at top of mind when performing a CMA. Those two properties likely won't merit the same price, so it's important to adjust for renovation and condition.
Comparative market analysis example
Let’s say a buyer or investor would like to make an offer on a three-bedroom, two-bathroom home of 2,000 square feet. The subject home is listed at $250,000. The investor or buyer’s realtor does a CMA to find three appropriate comps, and then calculates the price per square foot for each of them.
One home was larger, at 2,500 square feet, with a sold price of $300,000. The second was smaller and less expensive: 1,800 square feet, selling for $225,000. And the third home was similar to the subject home; it was also 2,000 square feet, and sold for $210,000.
From here, we calculate the average price per square foot of all the homes, in a formula that looks like this:
In other words, the first comp home worked out to $120 per square foot, $125 for the second, and $105 for the third—so the average of all those comes in under $117, which means the market price for the subject property comes in at about $233,340.
Benefits of CMAs for real estate investors
Comparative market analysis provides both knowledge and leverage. Being able to perform an accurate CMA is a cornerstone of a successful real estate business. Bottom line: The more you know about property value, the more you know about whether or not you’re getting a good deal on your real estate investment.
When you have a solid set of comparative data, you put yourself in an excellent negotiating position. For instance, if you’re considering a property that’s older and less updated than its comps, that’s a jumping-off point for negotiations. So are factors like inferior views, lower-end appliances or other finishes, or a general need for updating. You might use these factors to negotiate a significant chunk off the sale price if you are armed with the data that comes from a thorough investigation of the comps.
Likewise, if a home is priced similarly to other comps—but it's the only property with a pool in a hot region—well, you could be getting into a solid opportunity. It might be a good time to make an offer.
Comparative market analysis vs. appraisal
An appraisal also attempts to determine the factual value of a home—so what makes it different from a CMA? Simply put: A CMA is performed by a real estate agent or broker, and an appraisal is done by a licensed real estate appraiser. While a CMA is a great way to determine list price, or how much to offer, it's still a rough estimation. Home sellers and home buyers can utilize this number, but banks will not. Appraisers, however, are trained to provide a factual estimation of fair market value.
Additionally, an appraisal is typically performed for a bank during the closing process. This detailed report determines the number used to determine how much the bank is willing to lend for a property—so if the appraisal comes in low, it can actually affect a buyer's ability to get a loan.
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