As a real estate agent, you understand the importance of accurate pricing of your listings. Listing at lower prices cause loss to the sellers, while overpricing reduces or eliminates potential buyers. Therefore, you need to decide on the maximum price the buyer will pay and the lowest price the seller will sell. The ultimate goal is to make both buyers and sellers feel like winners. Negotiations are a key part of this process, and a comparative market analysis (CMA) can help support you during them.
Although it can be challenging to conduct a CMA, this comprehensive guide will alleviate your concerns.
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What is a comparative market analysis (CMA) in real estate?
Simply put, a comparative market analysis (CMA) is a report comprising the estimated value of your home or property based on the past and current prices of similar properties in the same neighborhood. Buyers, sellers, and agents often use these reports to strike an excellent real estate deal that benefits everyone involved.
A CMA evaluates many factors, including the size, location, condition, and style, to determine the most accurate price for the property.
Who can use a comparative market analysis
Anyone looking to make a real estate deal can benefit from using a CMA. The CMA’s objective depends on who is conducting it.
Here’s who can benefit from a CMA:
A detailed comparative market analysis can help sellers understand how much their property can fetch in the real estate market.
Most buyers want to get reliable details and pricing of available properties. The CMA of the seller’s property can help buyers understand why the property is worth the current listing price. The better the CMA is, the easier it is to convince the buyers.
Plus, if the cost of a seller’s listing strays too much from the expected market value of their property, it can lead to listing expiration and a decrease in value.
Every buyer wants the best property they can get for the most reasonable price. Again, a reliable and coherent comparative market analysis helps them understand why a property is worth its listing price.
The CMA will help interested buyers adjust their budget, raise enough funds to buy the property, and amend their ROI expectations if they plan it as an investment. It also helps buyers change their decision if they do not have enough money and want to wait for the prices to fall based on existing or future market trends.
Real estate agents
Having reliable and accurate CMAs eases your relationships with your clients. Having an accurate and detailed CMA of a property the clients want to buy makes it easier for you to convince them why the listed price is fair and a good investment.
The CMA consists of hard facts verifiable by the client and their banker rather than pure speculation. In addition, you can use details of past property sales to confidently present your current listing price and improve your chance of closing the deal.
What you should include in a comparative market analysis
Now that you’ve read what a CMA is and how it can help you, here’s what you should include in your comparative market analysis. The more reliable your report information, the more accurate your property value will be.
When completing a CMA, consider the following:
The location of the property
Most of the time, real estate agents determine the price of a property by considering the listing prices of other properties sold in the same location. A location with high-priced properties will naturally make the price of any property in that area high. If your location does not have enough data due to not having enough other properties, you can use the data of similar locations.
The square footage of the property
The bigger the property, the higher the price it will fetch in the market. The square feet will help determine the price.
The number of bedrooms and bathrooms on the property
When conducting a CMA, consider the number of bedrooms and bathrooms. Properties with the same numbers will make the best data points.
The acreage of the property
The price of the land or the lot factors into the final price of the property. A house on an acre is worth more than a house on a half-acre lot.
The age of the property
When comparing the prices of similar properties, remember not to compare an older house exactly to a newly built house. An older house will need repairs and maintenance, bringing down its value. However, it would be best to consider how antique and architectural finishes on older homes can up their value.
The additional amenities
Houses have endless variations in amenities: swimming pools, decks, fireplaces, and basements. While some buyers think these add value, others view them as liabilities due to maintenance requirements.
The time of sale
The value of properties changes as time passes and new trends come. Compare properties sold within a similar timeframe to make an accurate comparison.
How to conduct a comparative market analysis
Here are seven steps you must follow to complete a comprehensive comparative market study in the real estate industry:
1. Gather publicly available data on the property
Start by creating a comprehensive database of the property for which you are creating the CMA. You will need details to make comparisons. While the property’s listing document may have enough details for the CMA, you will benefit from a field study.
Check the property details with the local administrative authority. You can find pertinent property details, such as the current tax rate, historical improvement permits, etc. The improvement permits are essential, as changes without the permit are considered temporary. Hence, they ideally won’t be included in the analysis.
Conduct a detailed assessment of the house and create a note with this data:
- Year built
- Square footage
- Number of bedrooms and bathrooms
- Location details
- The acreage info of the lot
- Assessment of the architecture
- Evaluation of interior finishes
- The amenities in the property
- Details of the improvements done
- The tax bill from the previous year
- The overall condition of the property
Once you have all these details, start analyzing them and make an inclusive description that will allow for a thorough and foolproof comparison.
2. Collect previous listing details of the property
Before working on the CMA, you need to get reliable information about the property’s ownership history. This will allow you to review the sales history and how the price of the property has fared over the years through diverse changing trends.
Find answers to the following questions to get a comprehensive picture of the performance of the property:
- Has the price of the property followed or deviated from the industry trends over the years?
- Did the ownership change too many times over the years, indicating something troublesome?
The answers will help you better understand the property. Use the current local industry trend to predict the property’s price if it conforms to the trends historically. Any deviations from the trends need to be explored and researched to find the reasons.
You may also consider arranging interviews with the previous owners to gather unique selling points of the property. These interviews will allow you to gather real experiences from the owners that you can use to connect potential buyers to the property and make it personal to them.
3. Collect details of similar properties sold for relevant comparison
You want to find comparable properties recently sold within the locality of the property you want to sell. Naturally, the more similar the properties, the better and more reliable the comparisons will be. Look for these similarities:
- Sold within the past year from the current date
- Located in a similar location or an identical neighborhood
- Able to perform well with small listing-to-closing windows
Remember that finding similar properties for comparisons may be challenging if your property has unique traits that are hard to quantify. Special features will require you to perform additional research to effectively quantify and value them.
Also, selecting the wrong properties to compare can lead to an inaccurate CMA, leading to unfound expectations and loss.
4. Look for current properties listed for comparison
Gather in-depth insights for pricing your property by researching active listings. Current listings will provide insight into buyer behavior and what they desire. Plus, their relevancy can help you up your pricing game. Based on the analysis, determine whether you are overpricing or underpricing your property. Both will hinder your business.
5. Compare your property with similar properties you found
Start with your property. Analyze its historical value. Keep in mind you are dealing with the historic price of the properties. To arrive at an approximate current price, remember the industry trends and the overall percentage of value increase in the industry. Using this focused approach, you’ll arrive at an appropriate price range for the property. Double-check your math a couple of times to ensure accuracy.
Next, compare the prices of similar properties sold in the local industry in the last year. You can reduce the window to 6 months if the industry has been particularly volatile. This research will help you decide on another figure for the price.
Last, assess the current market to understand how the industry performs currently with similar properties in your locality. Look for under-contract listings that are not closed yet. You’ll then have accurate insights into the current market price of properties similar to yours.
Once you have all these factors in mind, you can create the price range based on the historical sales prices, recent sales, and existing listings. Now, rank these prices from the lowest to the highest to get a comprehensive price range of the property. Add the trend into the equation to make the prices even more aligned with the current market behavior.
6. Adjust for the differences in your property
Adjust the prices based on the differences between your property and the compared properties in the market. Increase or decrease the property’s value based on the number of bedrooms and bathrooms. For example, if your property has one bedroom more than the compared property, add value to your property. Similarly, reduce the price if your property has one less.
7. Arrive at the price per square foot
Congratulations, you have reached the final step of conducting a comparative market study. You have all the data you need to make the comparison and final price. All you have left is the math. Divide the arrived price of the comparable properties by their square footage to get the average square foot price.
You can add the square foot price of the compared properties together and divide by the number of properties to get the average. To get to your estimated fair market value, multiply the average square foot price you calculated with your property’s square footage.
Document this information into a well-designed report, and you have a comprehensive, accurate, and reliable listing price that will stand the test of any buyer, seller, or refinancer.
Example of a comparative market analysis
The Cooper family is interested in buying a home. They prefer a four-bedroom house with 2,000 square feet. They have considered a property listed for $400,000. However, they do not want to pay that much and wish to go for a slightly lesser price tag.
They ask their real estate agent to conduct a CMA to assist them in negotiating a better price for the property.
The real estate agent collects the following details:
- The house is in excellent condition with all the amenities a family needs.
- The house has four bedrooms, three full bathrooms, and a half-bathroom.
- The house has a fireplace, a two-car garage, and a fully-finished basement.
- The house sits on a half-acre lot in a great location.
- The house is 2,200 square feet.
- The location has many houses with similar square footage.
As the location has many similar houses, the agent finds four different houses with comparable features and areas. One of the houses sold for $400,000 and the agent finds that it has an additional bedroom.
The agent calculates that the additional room adds $5,000 to the house price. The agent adjusts the comparable price to $395,000.
As the house does not have a finished basement, the agent adds $3,000 to the home value. The value of the house now adds up to $398,000. The agent goes through the same process with the other comparable properties.
Once the agent completes the evaluation of the properties, the agent calculates the average square foot value of the property and finds that it is $190. Using the same figure, the agent multiplies the square footage of the property, 2,000 square feet to get the final listing price of $380,000.
The Coopers can now confidently make an informed decision to offer $380,000 for the house. Since the offer is appropriate based on the comparable houses, they’ll have an excellent chance of having their offer accepted.
Comparative market analysis reliability
While no one can claim total accuracy for CMAs, CMAs provide the best insight to sellers, buyers, and real estate agents regarding real estate deals. And they present more accuracy than the market value estimations from most home value estimators (like Zillow), which tend to underestimate prices.
Advantages and limitations of a comparative market analysis
Understanding the pros and cons of conducting a CMA will prep you for success.
Advantages of comparative market analysis
Help determine the most accurate property price
Pricing a property is complex. Preparing a CMA will help you arrive at an informed price range that is logically determined and presented as your branded report.
Help sell the properties faster
Properties with a reliable CMA sell faster than other properties. As you create a CMA report after extensive research, analysis, and calculations, the final estimated price accurately represents what the property is worth. This accuracy accelerates sales.
Help discover the property’s trend
A CMA depends on a range of elements, from past sales prices of the property and current prices of similar properties in the neighborhood. Therefore, you can clearly understand how the property has responded to current market trends and how that affects the price.
Help secure a thorough evaluation of the property
When a property goes up for sale, there must be reliable and detailed information about the property a buyer can read, assess, and rely on to make a decision. A CMA provides this and will include all the details a buyer may be interested in knowing about the property.
Limitations of comparative market analysis
CMAs have these limitations:
- Do not consider the wear and tear of properties
- Do not consider differences in locations within a particular neighborhood
- Consider properties that are out of the chosen location
The bottom line
CMAs enhance your real estate business. They allow you to serve your clients better by providing critical information for selling and buying homes for your clients. Using CMAs to close a few deals will leave excellent impressions on your expertise and reputation as a real estate agent. Take the above steps when conducting a CMA, and you’ll support your clients in making the best decision.