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About Comparative Market Analysis
If you are looking to sell your current home or you want to buy a new one, determining how much to ask or offer can prove to be a challenge, especially if you are doing it the first time. And this is where comparative market analysis comes in.
Simply put, comparative market analysis or CMA is a tool that realtors use to determine how to price a particular property based on the value of recently sold, similar properties in the neighborhood.
Realtors use market analysis reports to help buyers make the right offers. They also rely on the same reports to help sellers price their properties competitively.
When it’s time to buy or sell a home, most people only think about the location, number of bedrooms, number of bathrooms and square footage. However, the property’s condition, age, lot size, features, available amenities, among others, will all affect its pricing.
Therefore, when doing market analysis, the realtor will consider all these aspects and compare the property with recently sold ones. They will then use that information to determine an approximate value of the property.
Features of a Comparative Market Analysis
Completing CMA can be a complex process. To this end, realtors usually break it down into smaller or separate manageable parts.
The smaller, separate parts make it easier for the seller or buyer to understand the property valuation or estimation better.
To conduct a comparative market analysis, the realtor will first compile a list of approximately three homes within the same neighborhood, which have been sold within the past six months. However, three months will be preferable.
The three selected properties should have similar features and be as closely located as possible. Here are some of the standard features that you will find in a CMA report:
The three selected comparable properties should be within the same neighborhood as the target property. Also, they should be within close proximity to the subject property.
However, the realtor may sometimes find it hard to come up with comps that have been sold within the last six months, especially if the subject property is located in a quiet market.
In such a situation, the realtor may choose other comparable properties located in a market that is considered similar, taking into account factors like schools, hospitals, noise level, crime rate, and proximity to amenities, among others.
A property’s size also plays a vital role in determining its market value. Even a small difference in acreage can lead to a huge difference in price.
Therefore, when doing a market analysis, realtors will also choose properties with similar lot sizes.
Home Square Footage
Different properties come with different square footage. And as you may expect, the bigger the house, the pricier it will be.
However, the realtor will also go a step further and examine the livable square footage in the house. Essentially, comps should have similar square footage.
Property’s Age and Condition
A comparative market analysis will also consider the year the house was built. Also, the realtor will check whether the house has any recent renovations.
As you may expect, newer houses built with energy-efficient, modern materials tend to be pricier than older ones.
Some houses come with special features like patios, fireplaces, finished basements, garages, and swimming pools, among others.
Such features may also come into play when determining the value of a particular property.
However, it’s worth mentioning that some features may not increase the value of a property. Therefore, the realtor may not consider them when doing the comparative analysis.
Such features may include things like extensive landscaping, hot tub, solar panels, and new HVAC, just to name a few.
Number of Bathrooms and Bedrooms
Real estate agents also take into account the number of bedrooms and bathrooms for each comp when doing the comparative analysis.
As noted earlier, conducting a comparative market analysis can be a complex process, especially if you are doing it manually.
To this end, most realtors use specialized software to generate professional-looking and comprehensive market analysis reports.
How to Do a Comparative Market Analysis
By now, you already know what a comparative market analysis is as well as the components that go into one. So, how do you undertake a comparative market analysis? Here are the steps to follow:
Gather Data About the Subject Property
As noted earlier, conducting a comparative market analysis entails comparing the subject property with similar ones sold recently.
So, if you want to get an accurate comparison, you will need to gather as much information as possible about the subject property.
The more information you have, the easier it will be for you to come up with an accurate value for your listing. Some of the details you should gather about the subject property include:
- Total square footage
- Year built
- Number of bathrooms and bedrooms
- Recent renovations
- Specialty features
To collect these details, you will need to make an in-person visit to the subject property. The property’s deed should also provide you with additional details.
Examine Recent Comparable Sales
After you’ve gathered enough information about the subject property, you should then proceed to compare it with other similar ones.
And to do this, you will need to identify at least three to five comparable or similar properties in the neighborhood, which have been sold over the last three to five months.
When selecting the comps, you should pay attention to features similar to the subject home. And this will include things like the square footage, bedrooms and bathrooms, lot size, layout, and year built, among others.
If possible, you should choose the most recent comps since their pricing will be more accurate. As you may probably know, real estate prices fluctuate quite rapidly.
But if you can’t find recent listings, you can extend your search window back to a year or so.
Check Comparable Listings on Sale
Besides checking for the already sold properties, it will also be a good idea to check the current properties on sale, which are similar to the subject property.
You will use the same approach as you did in the step above. Therefore, you will check three to five properties that are currently on sale, which share similar features to your subject property.
You can then approximate the value adjustment they will need to make them equivalent to the subject property.
Adjust for Differences
After selecting the comps, you should then proceed to adjust the differences between each comp and the subject property.
If you are an experienced realtor, you should be in a position to assign a dollar figure to each difference between the subject property and the compass. And from there, you can adjust the value of each comparable property accordingly.
It’s worth mentioning that if the comparable property has a feature superior to the subject property, you will make a negative adjustment to its value and vice versa.
For instance, if the comparable property has extra bathrooms, it’s highly likely the buyer paid extra for the additional bathrooms. And in this case, you will need to deduct its dollar figure from the comp’s sale price to account for that.
Simply put, it will be an apples-to-apples comparison when you are making the adjustment.
Determine the Sale Price Per Square Footage
Once you’ve finished adjusting all the differences, you should then divide each comp’s adjusted price by its square footage. The figure you will get is each comp’s sale price per square foot.
From there, you should then add all the comps’ sale prices per square foot and divided them by their number. For instance, if you used five comps, you will divide the total sale price per square foot for all the comps by five.
And this will give you the average sale price for the comps. You should then multiply this figure by the subject property’s square feet, thus giving you its current market value.
Wrapping It Up
Learning how to conduct accurate market analyses is vital for every realtor. With such expertise, you will manage to list more properties, establish yourself as an expert in your field and earn more clients.