Knowing the fair market value is important whether you’re buying or selling a property. When you’re selling, you want to know how much to list your home for. When you’re buying, you want to know whether or not a particular price is fair. Either way, a comparative market analysis (CMA) is a powerful tool for finding that perfect price. Here’s everything you need to know.
What Is A Comparative Market Analysis (CMA) In Real Estate?
A CMA is an analytical tool that real estate agents use to determine a property’s fair market value. This is no easy task since several factors determine the value of any particular home. These include the number of bedrooms, number of bathrooms, square footage, and of course location, location, location. However, other factors like the condition of the home and the overall market are also essential factors.
For this reason, a CMA takes into account other similar properties in the same geographic area. By knowing how much these similar homes have recently sold for, you can get a reasonably accurate estimate of your home’s value.
[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]
Understanding CMA In Real Estate
To create a CMA, you first need to find comparable homes. This means homes of the same size, with the same number of bedrooms and similar amenities. The homes should also be located as close as possible to the target property, preferably in the same neighborhood. The closer these properties are, the more accurate the CMA will be.
In order to get a proper analysis, you also have to find homes that were sold recently, within the last three to six months. If the market is slow or you’re in a rural area, you might need to get a formal appraisal instead.
Remember that, unlike appraisers, real estate agents don’t have an appraiser’s license when they perform a CMA. It’s just a ballpark analysis. That said, certain states have laws to protect you if your agent creates the CMA in an incompetent manner.
Real Estate CMA Vs. Appraisal
A CMA and an appraisal use similar methods to determine your home’s value, including making comparisons among homes in your area. But beyond that, there are some fundamental differences. Appraisals are created by professional, licensed home appraisers, while CMAs are performed by real estate agents.
For practical purposes, a CMA is what you use to get a ballpark figure. Generally, you’re going to be pretty close to a home’s value. An appraisal is what you get when you’re applying for financing, and it determines how much the bank is willing to offer.
Market Conditions & CMA In Real Estate
Market conditions can affect a property’s value in ways that aren’t always apparent when you conduct a CMA. A good example of this is a neighborhood that’s undergoing gentrification. In that case, sale prices from three or six months ago might not accurately reflect market conditions. The same could be true for a property in a neighborhood that’s rapidly deteriorating.
This is one reason not to take comparative market analyses as gospel. Nothing is set in stone until you get a formal appraisal.
What Goes Into A Comparative Market Analysis Report?
Preparing a CMA might seem complex, but like other complex tasks, it can be broken down into smaller components. When all of these components are taken together, they give you a working estimate. To begin with, an agent will look for three to five similar local properties that sold in the last few months.
But what makes a property similar? Here are some of the things your agent will consider:
Location is the most important factor. If there aren’t enough properties in your area, your agent may look at another neighborhood with a similar school district and crime rate, similar highway access, and so on.
Square footage is a measurement of the house size. The bigger the house, the more it’s going to be worth.
The number of bedrooms and bathrooms is just as important as the square footage. All things being equal, a house with more beds and baths will fetch a higher price.
Acreage is a measurement of the size of the lot. A similar house will be worth considerably more on an acre lot than a quarter acre.
The property’s age and condition are key factors because they speak to maintenance costs. An old, run-down house will require repairs, so it’s not going to be worth as much. Newer homes are also more energy-efficient, which saves money on energy bills. Then again, some older homes actually have higher values due to their historicity or unique architecture.
Special amenities like decks, swimming pools, finished basements, and fireplaces can also be a factor. That said, few of these things will have a meaningful impact. Some features, like an in-ground pool, won’t actually increase the value at all, because of the associated maintenance costs and “attractive nuisance” issues.
The date of sale is important because property values change over time. If you’re not comparing properties that sold in a similar time frame, you’re not making an apples-to-apples comparison.
Terms of sale matter because some sale terms directly impact the seller. For example, the buyer may ask the seller to cover some of the closing costs or purchase title insurance. In that case, the seller might agree, in exchange for charging a higher overall price. If you plan on asking for a lot of contingencies, your agent will take that into account when performing your CMA.
How To Do A Comparative Market Analysis In 5 Steps
Conducting a CMA requires five distinct steps:
Do A Neighborhood Evaluation
Review Property Details
Adjust For Differences
Determine The Sold Price Per Square Foot
Let’s take a closer look at each of these things.
1. Do A Neighborhood Evaluation
To begin with, determine the overall quality of the neighborhood. How is the school district? Is it noisy or quiet? How long does it take to drive to the nearest grocery store? Is there an HOA, and if so, what are their rules? Are there any nuisances in the area? All of these things will help you nail down the “location” factor.
2. Review Property Details
Make sure you know the square footage of the house, the acreage, and the number of bedrooms and bathrooms. Look for any obvious issues with the property’s condition, to see if anything is in obvious need of repair. Also, look for amenities like sun rooms that could increase the home’s value.
3. Find Comparables
Now, look for three to five comparable homes that have sold within the past few months. The closer these properties are geographically, the better. Next, note any differences between the comps and the home you’re trying to analyze. If they have different square footage, amenities, or number of rooms, write that down.
4. Adjust For Differences
Once you’ve written down any discrepancies between your comps and your main house, it’s time to make your adjustments. If the comp is superior to your house in some way, subtract some money from its value. For example, if your comp has an extra half bath, you would subtract some money from its value. Conversely, you would add money for any negative features, such as a comp that’s slightly more run down.
This might seem backward, but it’s not. You’re making the comps appear closer to your house on paper by accounting for these differences. In other words, you’re getting a more accurate comparison.
5. Determine The Sold Price Per Square Foot
Now it’s time to make your comparison. Divide each comp’s adjusted value by its square footage, and you’ll get the price per square foot. Then, add the price per square foot for all your comps, and divide by the number of comps. This will give you the average cost per square foot. Multiply that number by the square footage of your house, and you’ll have your estimated fair market value.
Comparative Market Analysis Example
Let’s take a look at an example CMA to see how they work in practice. The Jones family is interested in a three-bedroom home that’s on the market for $400,000. However, they want to make an offer at a lower price, so they ask their real estate agent to perform a comparative market analysis. So, the agent gathers the following information on the property:
The house has three bedrooms, two full bathrooms, and one half bathroom
The floor area is 2,000 square feet
There’s a fireplace, two-car garage, and a finished basement
The house is in good condition
It sits on a half-acre lot
There are many similar homes in the subdivision
With this knowledge in hand, the agent searches for comps. Since the subdivision is full of similar homes, he’s easily able to find three comps that have sold in the last six months.
One of these comps has a fourth bedroom and sold for $400,000. The agent consults a table and determines that the fourth bedroom added $4,000 to the property’s value, so he adjusts the price down to $396,000. However, that house also did not have a finished basement. Since a finished basement adds $3,000 to a home’s value, the agent adds $3,000 for a new adjusted value of $399,000. He continues making adjustments until he’s accounted for all the differences in the comp properties.
After making his adjustments, the agent then divides the adjusted value of each house to get its cost per square foot. He adds those numbers together, then divides by three to get an overall average of $187.50 per square foot. Multiplying that number by the home’s 2,000 square feet, the agent comes up with a CMA value of $375,000. The Joneses can make an offer for that amount and have a reasonable chance of acceptance.
Benefits Of A CMA For Real Estate
So, what are the benefits of going through the CMA process? The benefits are different depending on whether you’re a buyer or a seller.
A CMA helps you ensure that you’re not overpaying for a house as a buyer. This isn’t the same as guaranteeing that you’re getting the lowest possible price. But you at least know you’re not paying way more than the house is worth.
A CMA lets you know whether you’re listing at the right price as a seller. Again, this doesn’t necessarily mean that you’ll get the price you listed for. But by starting at the high end of “reasonable,” you give yourself some wiggle room to haggle down if need be. A CMA also lets you know if you’re getting a good value by selling now, or if you’d be better off waiting for the market to change.
A comparative market analysis is a tool used by real estate agents to determine the fair market value of a property. It’s used both by selling agents, for deciding on a listing price, and by buying agents, for deciding whether a deal is fair. With just a few minutes of research, a CMA lets you quickly and easily determine a property’s value.
Ready to start taking advantage of the current opportunities in the real estate market?
Click the banner below to take a 90-minute online training class and get started learning how to invest in today’s real estate market!