How to Perform a Comparative Market Analysis in Real Estate
As a real estate agent, you’re tasked with helping your clients sell or buy a home quickly and at a fair price. The housing market changes fast, and being prepared with a good offer or sensible listing price can make the difference between an expired listing and a closed deal.
That’s why, whether you’re representing a buyer or seller, it’s important to be prepared with a solid comparative market analysis or CMA report. In this blog, we’ll share a comprehensive step-by-step guide on how to perform a comparative market analysis for real estate.
WHAT DOES CMA MEAN?
CMA is short for comparative market analysis. Contrary to popular belief, it is not the same thing as an appraisal, which is an estimate of a property’s market value based on a variety of factors, including location and condition.
A Comparative Market Analysis (CMA) is an important tool in real estate for determining the value of a property by comparing it to similar properties in the area that have recently been sold or are currently listed.
CMA EXPLAINED
A CMA is crucial because it provides both sellers and buyers with an accurate picture of the property's market value based on recent sales of similar properties.
The importance of CMA for sellers lies in setting a competitive and realistic listing price to attract potential buyers and ensure the property does not linger on the market. An overpriced property may deter buyers and lead to prolonged market presence, ultimately necessitating price reductions and potentially resulting in a lower final sale price.
Conversely, an underpriced property can lead to lost revenue. By offering insight into current market trends, average price per square foot, and the speed of sales in the area, a CMA helps sellers price their property appropriately and strategically.
For buyers, a CMA is equally important as it ensures they make informed offers and do not overpay for a property. By comparing recent sales and current listings of similar homes, buyers can determine if the asking price is reasonable and competitive. This information empowers buyers to negotiate better deals and avoid overpaying.
Additionally, a well-conducted CMA can help both parties avoid appraisal issues, which can arise if the sale price is significantly higher than the appraised value, potentially complicating the financing process.
WHO CAN PERFORM A CMA?
- Real Estate Agents and Brokers: Licensed real estate agents and brokers typically perform CMAs. They have access to the Multiple Listing Service (MLS) and other resources needed to gather and analyze the necessary data.
- Real Estate Appraisers: Although appraisers typically perform formal appraisals, they also have the skills and tools to conduct CMAs.
- Property Owners (with limitations): While homeowners can attempt to perform their own CMAs using publicly available data, they may not have access to comprehensive and up-to-date information, making it less accurate than one prepared by a professional.
- Real Estate Investors: Experienced real estate investors may also conduct their own CMAs, especially if they have access to detailed market data and have a deep understanding of the local real estate market.
HOW DOES A CMA WORK?
In real estate, like in life, there’s a first time for everything. The good thing is, if you’re looking for help putting together your first CMA, you’ve come to the right place! Here's how you can perform a CMA:
1. EVALUATE THE NEIGHBORHOOD
“Location is everything” didn’t become a common saying for no reason. Even before you start looking at the property, check out the neighborhood. Make a note of the essential pros and cons that can impact its value.
For example, being close to noteworthy schools and having curb appeal might be a significant plus. On the other hand, a lack of reliable municipal services and having train tracks nearby may be value-lessening drawbacks.
2. CHECK OUT SIMILAR LISTINGS IN THE NEIGHBORHOOD
Now, it’s time to evaluate other listed properties in the area. Visit the neighborhood itself or go to different real estate websites to find homes that are comparable to the one you’re working on.
For example, if you’re the listing agent for a 2-bedroom, 1.5-bathroom home in the Alden Bridge subdivision of The Woodlands, TX, look for similar properties that are for sale or recently sold in the area (ideally, in the same or a similar subdivision).
Pay special attention to recently sold or freshly posted listings, as these are the most relevant comparisons given the time-sensitive nature of housing markets.
Create a list of properties, their listing price, and their selling prices (if available). Note how they stack up to the property in question across different categories such as landscaping, square footage, age of construction, and even HOA standards!
3. COMPARE THE MOST RELEVANT LISTINGS FOR “MINOR” FACTORS
No factor is “minor” when it comes to what could be one of your clients’ biggest financial decisions. However, if you were to compare every single factor of each listing in the area to the one you’re working on, you’d never finish!
Pick two or three of the most comparable properties from the list you created in step two. Then, look for issues or features that may make them more or less valuable than the home you’re working on.
For example, some valuable features may be an oversized lot, stainless steel appliances, or a pool. On the flip side, value-decreasing issues include nearby foreclosures, unfinished renovations, and even messy neighbors.
4. CALCULATE THE AVERAGE PRICE FOR YOUR MOST SUITABLE COMPS
Use your most suitable comps’ selling (or listing) prices and divide each by the square footage. Keep in mind that listing prices tend to be higher than selling prices, so take the results for the former with a grain of salt.
Once you have the price per square foot (PPSF) for each comparable property, add them up and divide it by the number of comps to get the average price per square foot. Take the result and multiply it by the square footage of the property you’re working on.
For example, if you’re preparing a CMA report on a 2,000-square-foot townhome and have four comps to benchmark it against:
- Comp 1 is 1900 sq. ft. and sold for $200,000 (PPSF: $105.26)
- Comp 2 is 2200 sq. ft and sold for $250,000 (PPSF: $113.63)
- Comp 3 is 2000 sq. ft and sold for $190,000 (PPSF: $95.00)
- Comp 4 is 2100 sq. ft and sold for $210,000 (PPSF: $100.00)
The average PPSF of your four comps is $103.46. If you multiply that average by your listing’s square footage, you get $206,945. If you’ve done your due diligence finding suitable comps, this should be a good ballpark estimate of the townhome’s market value.
5. ASSESS THE LISTING ONE MORE TIME
If the listing you’re running a CMA on has unique assets or drawbacks, such as the ones discussed above, you may have to raise or lower the price (or offer) in proportion to those attributes:
- Necessary Upgrades: Outdated appliances, subpar plumbing, or worn roofing.
- Amenities: Gated community and walkability
- Additions: Swimming pool, landscaping, brick oven, and other attractive nuisances
6. PREPARE YOUR CMA FOR CLIENT DELIVERY
Once you’ve evaluated the comps and crunched some numbers, it’s time to show your clients all your hard work. Don’t let poor presentation detract from your effort, though!
Organize a clean and easy-to-read deck of slides and have a couple of copies printed and bound for your clients to look at. Don’t forget to include your contact information on the last page for referrals!
If you’re not confident in your slide-making skills, you can use professional CMA software to help you put the finishing touches on your report.
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No amount of research or design skills can hide a lack of knowledge. The truth is, there’s more to being a real estate agent than knowing how to perform a comparative market analysis.
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