What Is a Comparative Market Analysis?
A comparative market analysis is an examination of the prices at which similar or comparable properties in the same area recently sold. Real estate agents perform a comparative market analysis for their clients to help them determine a price to list when selling a home or a price to offer when buying a home. Since no two properties are identical, agents make adjustments for the differences between the sold properties and the one that is about to be purchased or listed to determine a fair offer or sale price. Essentially, a comparative market analysis is a less-sophisticated version of a formal, professional appraisal.
- A comparative market analysis is an examination of the prices at which similar or comparable properties in the same area recently sold.
- Real estate agents perform a comparative market analysis for their clients to help them determine a listing price when selling their home.
- The analysis includes assessing the neighborhood, property values, and calculate the average price per square footage for recently sold listings.
Understanding Comparative Market Analysis
A comparable market analysis can also include currently listed properties, especially if no similar properties were recently sold. However, listing prices only indicate what the seller hopes to get for the property and do not necessarily reflect what it is actually worth.
While the comparative market analysis is not an official appraisal, the real estate agent uses a great deal of similar practices and methods that an appraiser would use to arrive at a reasonable value for the property. If the home or property is so distinctive or unique that there are no comparable properties, it may be in the best interest of the owner to hire a formal appraiser to value the property.
Steps in a Comparative Market Analysis
Below are the typical steps that real estate agents might follow to complete a comparative market analysis:
1. Assess Neighborhood Quality
The first step is to assess the quality of the surrounding neighborhood. There are online search tools available that provide a wealth of information about a neighborhood.
Google Street View might be the best tool for researching the neighborhood. Here's what you're looking for:
- Nice blocks versus less attractive blocks
- Proximity to amenities, such as beaches, parks, and schools
- Proximity to unpleasant locations, such as garbage dumps, highways, industrial facilities, railroad tracks, and anything that decrease the value of nearby homes
- Significant curb appeal issues
Google’s images are a good starting point, but some of the images might outdated. So, it's not a substitute for driving through the neighborhood.
2. Assess the Original Listing if Available
Carefully review the photos and description to evaluate the age and condition of the home, recent upgrades, and potential issues with the previous marketing strategy.
3. Check Property Value Estimates
A property value estimate can help you evaluate the likely market value of your client’s home and give you a starting point when calculating the cost per square foot of the property. However, these estimates can be inaccurate and do not consider unique aspects of the local market.
4. Develop a Preliminary CMA
In developing a preliminary CMA, an agent will begin researching all of the various types of home listings in the area as well as compare and contrast the various features for comparable homes. Comparable properties that are typically incorporated in CMA include:
Prior home listings: Compile a list of sold, expired, and pending homes for the past six months. Sold listings will tell you exactly what similar homes in the area have sold for recently, and are your primary way to assess value for your CMA. Expired listings will tell you pricing the market is not willing to bear. Listings with a pending sale can give you a good idea of what similar homes are selling for right now. Current listings will tell you what your competition is like.
Quantity of bedrooms and bathrooms: Compare homes in the area that have the same number of bedrooms and bathrooms. The number of bedrooms and baths in a home is one of the most important criteria for valuing a home. For example, two-bedroom homes are generally less desirable than those with three or more. Likewise, homes with only one bathroom or no master bath often have a lower resale value than those with more.
Homes within 300 square feet of your listing: With a 2,000 square-foot home, look at homes that are between 1,700 and 2,300 square feet. Generally, more bedrooms equal a higher price, but square footage is almost as important.
The neighborhood: Determine what “neighborhood” the home is located in, but this step can be challenging since there's no clear delineation of where one neighborhood begins and another ends. Your online assessment of the neighborhood will help in this step.
Comparable school zones: School districts are especially important in larger cities, where there are a lot of schools in each district. Homes on one side of a street might be in an excellent school zone, while students who live in homes on the other side might matriculate at lower-quality schools. The quality and location of schools can have a significant impact on a home's value.
Similar lot size: In general, a home on 10 acres of land is going to be worth more than an otherwise comparable home on just one acre. Although, lot sizes can be similar in a neighborhood development, even the difference between one acre versus one-half acre can change the value of the listing. Evaluate the lot to determine if the home is in close proximity to the neighboring home or whether there are trees that provide a buffer.
Homes of similar age: Although it appears obvious that brand new homes are typically valued higher than older homes, some older homes, especially antique homes or mid-century modern homes, might command a premium over new construction because of their design.
Homes with similar features: For example, if the home has an in-ground pool or is in a gated neighborhood with a clubhouse, try to find other listings with similar features. Likewise, if the home is on oceanfront property, comparing it to other oceanfront homes will yield much better results than comparing it to homes a few blocks away from the water.
5. Get an Average Price of Comparable Listings
Take the selling prices of the comparable homes you’ve chosen and divide each by their square footage to calculate the price per square foot for each comparable home. Then, find the average price per square foot of the comparable homes and multiply it by the exact square footage of the home you’re trying to sell.
6. Assess the Home in Person.
Based on your research, you should have a ballpark idea of what the home is worth, so you should be able to address any questions about property value the homeowner has for you. When touring a property, consider factors, such as the condition, additions and upgrades, necessary upgrades, exterior and landscaping, and any amenities. Combine the preliminary data from comparable listings with information gathered during the visit to create a comprehensive CMA.
Example of a Comparative Market Analysis
As an example, let's consider a couple that's thinking about making an offer on a four-bedroom, two-bathroom, 2,500-square-foot, single-family home. The house is listed for sale at $280,000. The couple’s real estate agent performs a comparative market analysis and locates three similar properties that recently sold in the same subdivision. The agent needs to calculate the average square footage for all of the homes.
Homes in the area recently sold for with the following details:
- $300,000 with 3,200 square feet whereby the price per square footage was of $93.75 (300,000/3,200)
- $275,000 with 2,400 square feet and a price per sq. footage of $114.58
- $210,000 with 2,000 square feet and a price per sq. footage of $105.00
- Next, we calculate the average price per square footage for all of the sold homes, which is $104.44 or (($93.75 + 114.58 + 105.00 = $313.33) / 3)
Since the home that the couple is considering has 2,500 square feet, we multiply the average square footage of $104.44 from the analysis by 2,500 square feet. As a result, the appraised amount should be $261,100 or ($104.44 * 2,500).
Of course, other factors impact the value of the homes in the analysis, but with these results, the couple has a starting point in the negotiation process. If for example, the home being considered needs updates, the couple can cite the $261,100 figure from the analysis as a maximum bid for the house and save nearly $20,000 off the sale price.