What Is a Comparative Market Analysis
A comparative market analysis is an examination of the prices at which similar 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.
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 and/or unique where there are no comparable properties found, it may be in the best interest of the owner to hire a formal appraiser to value the property.
Example of a Comparative Market Analysis
Consider a couple that's thinking about making an offer on a four-bedroom, three-bathroom, 2,100-square-foot, single-family home on a quarter acre of land. The house is listed for sale at $300,000. The couple’s real estate agent performs a comparative market analysis and locates three similar properties that recently sold in the same subdivision:
- The first is identical in every way to the subject property except that it is located on a busy road; it recently sold for $275,000.
- The second has four bedrooms, three bathrooms, and is located on a quarter acre of land but is 2,400 square feet because it also includes a screened-in porch; it sold for $315,000.
- The third has four bedrooms, is located on a quarter acre of land and is 2,100 square feet, but it only has two bathrooms, both of which are outdated; it sold for $265,000.
Here are the typical steps that real estate agent might follow to complete a comparative market analysis:
1. Assess Neighborhood Quality
The first step is to assess the quality of the surrounding neighborhood and there are some good online tools these, which make this easier than ever.
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 like beaches, parks, schools, etc.
- Proximity to unpleasant locations like garbage dumps, highways, industrial facilities, etc.
- Significant curb appeal issues
However, Google’s images may be out of date, 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
Come up with a rough idea of your home’s value by evaluating sold listings, expired listings, active listings, and pending listings in the area that are comparable in features, size, and amenities to your listing. Comparable properties you should incorporate into your CMA include:
- Homes that have sold or are expired, are pending, or have been listed in 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.
- Evaluate homes with 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.
- Evaluate homes within about 300 square feet of yours. 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.
- Evaluate homes in the same neighborhood. Figuring out exactly what “neighborhood” the home is actually in can be difficult if it’s not a walled community. For that reason, it’s important to assess the neighborhood online first.
- Evaluate homes in the same or 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 difference schools make in home's value can be very significant.
- Evaluate homes with a 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.
- Evaluate homes of similar age. Brand new homes are typically valued higher than older homes, but some older homes, especially antique homes or mid-century modern homes, might command a premium over new construction because of their design.
- Evaluate 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 like: condition, additions and upgrades, necessary upgrades, exterior and landscaping, and other amenities. Combine the preliminary data from comparable listings with information gathered during the visit to create a comprehensive CMA.