In a real estate market that seems to be moving at the speed of light, it can be hard to determine a reasonable price for a property. This is where a comparative market analysis can be a huge help. Putting in some time and effort to perform a comparative market analysis can help you earn or save top dollar depending on if you’re selling or buying a property.
What is a comparative market analysis?
In real estate, comparative market analysis or CMA is the process of determining a property’s value based on the sale prices of similar properties in the surrounding areas. If you’ve ever watched HGTV before, you may have heard this process referred to as “running comps.” During this process, you gather data about the property in question, locate potential comparative properties, and compile all of this information into a report to make the best decision about buying or selling the property.
Why should you do a comparative market analysis?
A comparative market analysis is a valuable tool that you can use in a variety of different scenarios. Generally speaking, it helps you develop the market value for a specific property based on its features compared to others in the area. That being said, here are some specific instances in which you may want to perform a comparative market analysis to inform your buying and selling decisions:
- You can use a comparative market analysis to help sellers determine a competitive listing price for their homes. As a listing agent, you don’t want to set a price that’s too high that may lead to the house sitting on the market for months on end with no offers. But, on the other hand, you want to list it high enough to get your sellers as much profit as possible. Doing a comparative market analysis can help you find this sweet spot.
- You can use a comparative market analysis to help buyers determine a reasonable offer price for a home. As a buyer’s agent, you don’t want your buyers to overpay for a property that may not appraise. At the same time, you don’t want their offer rejected because the seller has received highly competitive offers. Doing a comparative analysis can help give you a good idea of what the house is worth and where you should come in on your offer.
- You can use a comparative market analysis to convince property owners to sell their homes by showing them what they can expect to sell them for. Many people have no idea what their house is currently worth in this market -- this is especially true if they’ve owned their home for a long time. You can provide them with valuable information that they can use to decide their next move.
- You can use a comparative market analysis to set fair market value rental rates for clients purchasing an investment property. Investors will want to make sure that the proposed rental price exceeds the mortgage and upkeep costs. You can provide them with the information they need to determine if investing in the property makes financial sense.
- Finally, you can use a comparative market analysis to appeal to property tax valuations. If you’re new to real estate, this is a great service that you can offer existing homeowners to build your experience and clientele.
How to do a comparative market analysis step by step
Doing a comparative market analysis isn’t exactly the most straightforward process. For this reason, we will break it down step by step so that you’re able to fully understand and perform each step and achieve the best possible results.
1. Gather information about the property in question
The first step in performing a comparative market analysis involves gathering information about the property in question. Some of this work can be done online, while other parts should be done in person for the most accurate information. Here are some different factors that you should consider during this step:
- Address and neighborhood of the property
- Characteristics of the neighborhood. For example, is it close to shops and restaurants? Is it close to the main highways? Does it experience any noise from neighboring highways or buildings? Does it offer any views? Does it offer any amenities like pools, tennis courts, or parks?
- Information about the local school district, including the zoned elementary, middle, and high schools for the property. It may also be a good idea to include the ratings of each of these schools. Finally, you can also include information about navy private schools as well.
- Assessor’s parcel number to make the rest of your research a lot easier.
- The lot size in square feet. If any of the square footage is unusable, be sure to make a note of this.
- The living square footage of the home.
- The number of bedrooms and bathrooms within the home.
- The year it was built with additional information about upgrades and renovations that have been done over the years. For example, a new roof, a new HVAC system, a new kitchen, or new floors.
- Information about any amenities included with the property itself, like a pool, spa, or lanai.
While it may be tempting to look up assessed values or even Zestimates during this process, you don’t want your results to be skewed by this potentially inaccurate information. Instead, you should let the data do the talking as you work through the rest of the steps in the process.
2. Analyze comparable properties
Once you have gathered all the relevant information about the property in question, you need to choose and analyze comparable properties in the area. But how do you determine which properties are similar? After all, there are tons of different factors and intricacies to consider. For instance, how much is a feature like a pool worth? Or being on a dead end street? Or having a brand new kitchen?
It can be challenging to assign a numerical value to these factors, but it’s an important part of the process. Here’s how to make it work:
- The first thing to take into consideration when selecting comparable properties is the neighborhood. Generally speaking, you’re going to want to choose homes in the same neighborhood or surrounding area. Pay close attention to school districts and views in this phase.
- The second thing to take into consideration when selecting comparable properties is the timeframe. You’re going to want to choose homes that have sold recently -- ideally within the past three months. However, you may expand your search to homes sold in the past six months if you have limited results.
- The third thing to take into consideration when selecting comparable properties is the construction of the property. You’re going to want to look for homes with similar square footage and were built around the same time. You’re also going to want to look for homes with the same number of bedrooms and bathrooms as the property in question.
- The fourth and final thing to consider when selecting comparable properties is any amenities of the home. This can include extras like pools and spas but may also have walk-in closets, kitchen islands, or hardwood floors-- features that make the home stand out and increase its value.
If you’re a real estate agent, you can find potential comparables through the MLS system. If you’re not a real estate agent or don’t have access to the MLS system, you can use tools like Redfin or Zillow to gather your comparables.
Once you have a large pool of results in a geographical area and timeframe, you can pare them based on more detailed information like square footage, property age, bedrooms, bathrooms, and amenities. Once you have your final selection of three to five properties, you can move on to the next step.
3. Compile your report
Now that you have all the information you need, it’s time to compile your final report! If you’ve never done this before, there are templates out there that may be able to help. At the same time, you can always make your own template to reuse in the future if needed. Before calculating your final numbers, you will need to complete both positive adjustments on these comparables since no two properties are the same. Once you have made all necessary adjustments, you can develop a final value for the property in question.
What to do with a comparative market analysis?
Once you’re equipped with the knowledge and information included in comparative market analysis, you have some decisions to make. If you’re selling, you’ll need to decide if you’re going to offer at market value, if you want to lowball, or if you’re going to make an aggressive offer above market value. If you’re buying, you’ll need to decide if you want to list your home below market value to set off a bidding war or if you’re going to price it higher to get the best return on your investment. These choices are up to you, but hopefully, they’re easier to make thanks to the comparative market analysis.
Final thoughts on comparative market analysis
As you can see, a comparative market analysis is an important real estate tool used in both buying and selling properties. For more information about the real estate industry, be sure to check out some of the insightful resources offered by Vaster Capital.
Joint tenancy: Definition, pros, and cons
Many people assume that buying a house is impossible for them to accomplish on their own. But what...
Warranty deed: What is it and should you get one
The home buying process can be highly stressful and intimidating. Your home will likely be your...
BRRRR Method: The Secret to Building a Real Estate Portfolio
While “BRRRR” might seem like a silly acronym, you definitely shouldn’t discount it! This real...