What Is a Comparative Market Analysis (CMA)?

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!) just how much to list their home (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 Do You Perform a Comparative 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 to analyze a local market effectively.

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.

From there, use the MLS 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.) 

Take into account similar properties in the same neighborhood. Consider matters besides just physical distance, such as attractiveness and busyness of the block, curb appeal, and access to a favorable school district.

You’ll also want to compare homes of similar size, considering not just 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 built within as narrow a date range as possible from your subject home—perhaps 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.

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. With this information, you can determine an appropriate listing price or a fair offer.

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:

(House 1 price/its square footage) + (House 2 price/its square footage) + (House 3 price/its square footage) / (total number of houses = 3)

Using that formula for this specific example, that equation looks like this:

($300,000/2,500) + ($225,000/1,800) + ($210,000/2,000) / 3 = $116.67

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 Comparative Market Analysis for Real Estate Investors

Comparative market analysis provides both knowledge and leverage. First, 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.