A Beginner’s Guide to Running a Comparative Market Analysis | Sales
One of the first steps when working with home sellers is setting the listing price of a home. When working with buyers, that first step is usually checking the value of a home before making an offer to purchase.
A home’s current worth can be difficult to pinpoint, and the best and most common way to find out how much a home is actually worth is by running a comparative market analysis.
What is a CMA?
A Comparative Market Analysis (CMA) is an in-depth report on a home’s current value. It is prepared by real estate professionals by examining the sale prices of similar properties in the area. There are two situations in which a CMA is needed: to tell a homeowner or seller how much their home is worth in the current real estate market, or to help a homebuyer decide if a home they want to purchase is a good value.
5 Steps to Running an Accurate Comparative Market Analysis
Step 1: Know the neighborhood
Running a comparative analysis involves more than just doing the math on prices in the area. An agent’s familiarity and experience with the local market can affect a CMA’s accuracy.
To set the right price, it’s essential to be familiar with a neighborhood and knowledgeable about the historical and current sale and rental value of real estate there.
A recent RENTCafe article shows the increasing popularity of single-family rentals in some areas. If you’re not already acquainted with the neighborhood, check it out in person or via Google Street View.
Assess the overall quality of the neighborhood and identify the attractive and not so attractive blocks. Examine its proximity to parks, school district, and other amenities.
Look at the curb appeal of homes in the area and identify any negative characteristics such as proximity to a noisy highway or dilapidated commercial buildings.
Step 2. Pre-assess the listing property online
If the property in question is already listed, browse the listing online before viewing it with your client. This will give you a preliminary idea of what to expect before visiting it in person.
Gather as much information as you can about the property, including year built, home size, lot size, construction type, architecture, and condition. Being informed will give you an advantage for your first meeting with the seller.
Step 3. Assess the property in person
Visit the property in person to gather detailed information needed to prepare an accurate report.
Note its most important metrics, such as size, layout, age, condition, finishes, and landscaping, as well as any features that might add value, including a pool, finished basement, large garage, or oversized lot.
And be on the lookout for issues that might affect the price negatively, like a roof in need of repair, poor overall condition, lack of central air conditioning, or other hidden issues.
Step 4: Select comparable properties in the area
Choosing the best three or four comparable properties in the area is crucial for the accuracy of a comparative market analysis.
To make a selection, scan MLS, Zillow, Property Shark, or Redfin for properties recently sold or closed on, active listings, pending sales, and expired listings.
Then, consider these three important factors:
- When the comparable property sold: In a hot real estate market where prices rise fast, the price of a home sold a year prior may be irrelevant today. The CMA report should examine properties with a date of sale as current as possible — ideally within the previous few weeks. If it’s a slow market and you must use comps sold several months prior, you might need to adjust the prices based on how the market has evolved since.
- Where it’s located: The location of the comps selected should be as close to the subject property as possible. It’s best if they’re in the same neighborhood, subdivision, and school district, or within one mile of the listed property. Residential areas can vary from one block to the next. Some properties are located next to a quiet park, while others in the same neighborhood might be next to a busy road. These subtle changes can lead to significant price differences.
- What its main features are: The characteristics of the homes used for comparison should be as similar as possible to those of the subject property. This applies particularly to the number of bedrooms, baths, square footage, and lot size. When the selection available is generous, use properties of similar construction type and architectural style. Homes with similar features are ideal, but this might not always be possible unless the home is located in a developed subdivision where all homes look the same.
Step 5: Prepare the comparative market analysis report
Using a template report form provided with your MLS or other software solutions, enter the information you gathered for the comparable properties selected and for your subject property.
Some price adjustments might be necessary to compensate for the differences in structure to better match the subject property.
For example, if the property you’re pricing has three bedrooms and a comp only has two, you’ll need to adjust the price accordingly.
Now it’s time to do the math. After making the necessary adjustments, divide the sold (adjusted) price of each property by its square footage to find the sold price per square foot.
Sold price of each property / square footage of each property = sold price per square foot
Then, multiply the calculated average price per square foot for your comparable properties by the square feet of your subject property to obtain its current market value.
Average price per square foot of comparable properties x square footage of subject property = current market value
To recap, your CMA report should contain:
- The addresses of the subject and comparable properties
- Information and characteristics of each property
- Sold prices of the comparables
- The total square footage of each home
- The adjustment values for lot sizes, bedrooms, baths, and garages
- The adjusted sold prices
- The dollar-per-square-foot value
- The subject property value
The final calculated listing price might need to be further modified, depending on how competitive the market is at the time.
A high inventory of homes for sale could force prices down, while a low inventory might permit you to adjust your asking price upward.