What is a Comparative Market Analysis?
Are you looking to buy or sell a home? The process of estimating the value of a home can be challenging. Moreover, the different criteria for calculating how much a property is worth may seem arbitrary. However, accurately pricing property is achievable if you understand the steps to take. To do this, real estate agents study and conduct a comparative market analysis (CMA).
Performing an accurate and consistent CMA can be challenging and requires knowledge. Many real estate agents need to gain an understanding of this crucial skill because it is rarely covered in pre-license real estate courses. That’s why we’ll explain the meaning of comparative analysis (CMA) and guide you through the steps of performing one.
What is a CMA in Real Estate?
Real estate agents use a comparative market analysis (CMA) to calculate a specific property’s worth by comparing it to similar ones recently sold nearby. Because the value of a particular home depends on different factors, it may be challenging to assess a property's fair market value correctly.
When buying or selling a home, you should consider the factors that impact the price and affect value of the property. Some examples of what to think are:
- Square footage
- Number of bedrooms and bathrooms
- Lot size
- The needs of the local and national markets
A CMA helps sellers find their homes' “best” listing prices. The price considered the “best” is not too low that you lose profits and not too high that it prevents the property from selling entirely. For buyers, a CMA can tell you whether a property has a fair value and help find a suitable, comparative offer that will be seen as credible.
Real estate brokers and agents don't always require an appraiser's license to conduct a CMA while helping buyers and sellers, even though a CMA is similar to an informal appraisal. However, completing an inaccurate CMA in certain states may hold real estate agents and brokers responsible. In such a situation, the agent must report to the state's real estate licensing commission and face disciplinary consequences.
How to Complete a Comparative Market Analysis
Now, let’s go over how to complete a CMA.
You should know that “subject property” in a CMA refers to the property for which you calculate the market value. Because comparison is a crucial factor of a CMA, we must first wholly comprehend the subject property to identify other comparable properties with which to compare it.
However, a CMA involves more than just comparing the values of previously sold homes in the area. Hiring a real estate agent to prepare a CMA report in the desired location is the most accurate technique to determine a home's value because they will have access to more data points and professional knowledge of the sector. They accomplish this by taking the necessary actions to provide an accurate CMA.
Step 1: Analyze the Area
The first step is to analyze the neighborhood where the subject property is located. Keep track of the critical features, such as:
- Proximity to any amenities
- Ranking of the local schools
- Most attractive blocks
- Curb appeal
- Any possible disturbances, like active train tracks or busy streets
Step 2: Evaluate the Data of the Subject Property
Second, create a detailed description of the subject property, providing information on different data points, including:
- The property’s age
- Square footage
- Lot size, condition
Doing in-depth research on the subject property will help you when making comparisons.
Examine the subject property's prior sales and listing history to gain additional valuable insights on what the market has or hasn't supported for the property. This will help calculate the home's value relative to the growth of the general market since the last time the subject property changed hands.
Gather information such as the following:
- Previous list and sold prices
- Price adjustments
- Days on the market
Step 3: Select Comps
The next step is to identify three to five comparable properties that local sellers recently sold that are as close as possible to the subject property. Relevant comparable sales also called "comps," are homes whose primary characteristics are identical to or strikingly similar to those of the subject property.
Because real estate values can change drastically, the best comparable homes are those that have recently sold and are as similar as possible in terms of:
- Construction type
Preferably, they were sold within the last six months. Additionally, the comparable properties must be located in the same school district, ideally a maximum of a mile apart.
Step 4: Adjust for Differences
Once you've evaluated the subject and comparable properties, it's time to assess and account for any discrepancies between the two. An expert real estate broker or agent can calculate the dollar amount of each difference and accordingly modify the value of each comp.
Additionally, imagine that the comp includes a better feature than the subject property, like an extra bathroom. It is logical to conclude that the buyer paid a higher price for the additional bathroom. To make an accurate comparison, you would remove a specific amount from the comp to account for the extra bathroom. Remember that the target home's value is never changed.
Step 5: Find the Sold Price per Square Foot
Calculate each comp's price per square foot by dividing the adjusted cost of each comp by the square footage after the price adjustments have been made. Next, sum the sold prices per square foot of all the comps and divide by the number of comps to obtain the average.
Step 6: Calculate the Subject Property’s Value
Lastly, to calculate the estimated fair market value, take the comparable property’s average price per square foot and multiply it by the subject property’s square footage. You might need to adjust this price depending on how similar the comps are and other market trends.
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