How To Do A Comparative Market Analysis

Every investor, regardless of their experience within the housing industry, needs to know how to do a comparative market analysis (CMA). Not only does the ability to properly value real estate come in handy on every single transaction, but knowing how to do a CMA can mitigate a great deal of risk. At the very least, a comparative market analysis will serve as the foundation on which every deal is built. In fact, you could argue that it literally pays to know how to do a CMA. Therefore, if you don’t know how to do a CMA (or simply need a refresher), it is in your best interest to learn everything you can about this invaluable skill in the following guide.

What Is A Comparative Market Analysis?

A comparative market analysis is the process by which buyers and sellers may assign an accurate value to a subject property. Otherwise known as a CMA, a comparative market analysis will assign a value to a subject property based on similar, nearby homes; think of it as an informal appraisal. However, instead of determining the value of the subject property based solely on its own features, comparative market analyses base their valuations on subsequent properties. The concept borrows the dynamics of property sales in a given area, and the variables used are relative to the local market. In its simplest form, however, an accurate CMA will use “comps” to value the subject property. As a result, comparative market analyses are often used by selling agents to identify a fair price point to list the property at.

Of course, for a comparative market analysis to work, investors must first learn how to find comparable properties.

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How To Find Comparable Properties

Comparable properties are subsequent homes within close proximity to a subject property that share a number of similar characteristics. As their names suggest, comparable properties are used to help determine the true value of the subject property. Otherwise referred to as “comps,” comparable properties are often used to compare the relative value of properties within given neighborhood.

Due, in large part, to the relative and subjective nature of pricing, “comps” can help buyers and sellers gauge whether or not a subject property has been priced fairly. That said, it’s not enough to simply choose any home within a given radius; the right homes must be chosen in order for a comp to reflect the value of a home accurately. As a result, “comps” must exhibit several characteristics:

• They must be in a similar condition of the subject property

• They should have sold relatively recently

• They should exhibit a similar amount of square footage

• They should have close to the same number of rooms and bathrooms

• They should be in the same neighborhood

• They should be the same type of property

When conducting a comparative market analysis, it’s important to find at least three comps that meet all of these criteria. Sold “comps” will award investors with the most accurate value, but that’s not to say there isn’t value in active sales (those that are currently being marketed). In analyzing active listings, investors may be given invaluable insight into how much inventory is available and which direction the market is heading.

Similar Condition

Comparable properties should match the current condition of the subject property. That’s not to say the “comp” needs to be in the exact same condition of the subject property, but rather that it should closely resemble the subject property. The condition of a “comp” is of the utmost importance, as the physical state of the property at the time of a sale will influence its sale price. Short sales, foreclosures and bank-owned properties are typically sold as is, and may need at least some work. If that’s the case, the “comp” may actually detract from the value of the subject property if the condition is even slightly worse off. As a result, it’s important to find homes that are in a similar physical state.

Recent Sales

In order to be considered a dependable “comp,” the property needs to have been sold relatively recently. The more recent the last sale was, the better suited the property is to serve as a “comp,” which begs the question: How recently should a home have been sold to be considered a good “comp” candidate? To accurately portray a reliable “comp,” a home should have sold within the last six months, and ideally within the last 90 days. Investors should adjust their margins accordingly. It may be necessary to increase the timeframe in which a “comp” was sold if the market had fewer sales or exhibited high volatility. Slower markets, for example, may require investors to expand their search criteria to a whole year.

Similar Square Footage

Not surprisingly, a good “comp” should be similar in size to the subject property it is being compared to. However, it’s not enough to simply assume a home is similar in size to another. If for nothing else, calculating the square footage of a home can be difficult for someone who doesn’t know what to include. Therefore, those intent on comparing properties must gain access to the “comp’s” property card (which can be found at the local tax assessors office) in order to determine the home’s true square footage. A good “comp” will have somewhere between 80% and 120% of the square footage of the subject property. However, in the event investors aren’t able to find a “comp” that meets those requirements, they may expand their requirements to include between 70% and 130% of the subject property’s square footage.

Same Number Of Rooms

While the size of the home is important, the number of rooms it boasts is even more important. Regardless of the “comp,” there is a greater emphasis placed on the number of rooms in the home than its actual square footage. Therefore, investors will want to find homes with the exact room count. Of course, it’s not always possible to find a “comp” with the same number of rooms and bathrooms, but one thing is for certain: there’s a huge difference between two, three and four bedroom homes in any given market.

Same Neighborhood

The single greatest aspect of a comparable is its location. Nothing is more important than the proximity of the “comp” to the subject property. Not unlike everything else that has been discussed up to this point, the closer the subject property is to the “comp,” the better. Ideally, the perfect property will be less than a half-mile radius away from the subject property. If necessary, investors may expand the radius to three-quarters of a mile, but the “comp” must be within the same city. To that end, it’s also important for the “comp” to be in the same neighborhood, subdivision, and school district.

Same Type Of Property

It should go without saying, but the “comp“ needs to be the same type of property as the subject property. If, for example, the subject property is a single-family home, the “comp” must also be a single-family home. Subsequently, townhomes must be compared to townhomes, and condos to condos. It does nobody any good to compare dissimilar types of properties.

Other Factors

In a perfect world, learning how to do a CMA would have investors compare multiple properties that are exactly the same. Unfortunately, that’s not how the real world works. More than likely, investors will need to know how to do a CMA report on several properties that are not completely alike. There will almost always be several factors that differentiate subject properties from “comps.” The location of the home, for example, will never be the same, which will need to be factored into every CMA. While “comps” are typically nearby, they may have different views or exhibit a slightly better placement in a given neighborhood. On top of that, the “comps” may have different amenities, be in better condition, or even have a pool. Case in point: there are a number of factors that need to be considered when learning how to do a CMA. These factors will either add to or detract from the value of the subject property.

When You Can’t Find A Comparable Property

It is not always possible to find “comps” that match the exact criteria an investor may be looking for. Outside of track housing, it’s entirely possible for each home in a given neighborhood to be unique, and unlike any within a close proximity to it. If that’s the case, investors may need to manipulate their search criteria. Try expanding the search criteria for each category as follows:

• Expand the acceptable square footage to 70%-130%

• Expand the acceptable radius to three-quarters of a mile

• Expand the acceptable radius to one mile

• Expand the acceptable sales date to include home sold within the last nine months

Feel free to expand the search criteria of “comps,” but be sure to account for price adjustments accordingly. For example, comparing the subject property to a home with fewer bedrooms may reflect poorly on its value.

Applying Your Comparative Market Analysis

Again, a comparative market analysis will look at “comps” in order to develop a more accurate valuation of the subject property. However, simply combing through “comps,” regardless of how accurate they are, will simply result in a list of several homes with corresponding price points. Therefore, investors will need to apply their “comps” to the impending CMA. It is at this point in which investors will need to develop a rough idea of the subject property’s value by evaluating sold listings, expired listings, active listings, and pending listings in the area.

Provided the “comps” are accurate, the next step is to calculate the price per square foot for each home. To do so, simply take the home’s most recent sales price and divide it by its respective square footage. Next, investors will want to average the price per square foot of all the comparable homes together and multiply it by the exact square footage of the home they are trying to value. The resulting number should give investors an idea of where to start valuing the subject property.

That said, the comparative market analysis isn’t done yet. There are still several variables to take into consideration: condition, location, additions and upgrades, necessary upgrades, exterior and landscaping, and other amenities. Investors will need to combine several additional factors (both objective and subjective) with the preliminary “comp” data to complete their comprehensive CMA. In other words, if the complementary data suggests the subject property is worth more than the “comps,” it is entirely possible to increase the price per square foot number from earlier.

Summary

There isn’t a single investor who wouldn’t benefit from learning how to do a CMA on their own. The ability to properly value a subject property is an invaluable skill, and can oftentimes represent the difference between a good deal and a great deal. If for nothing else, the more accurately an investor is able to value their own properties, the more likely they are to realize success on a deal. Consider the alternative: forming an inaccurate value on a subject property can be costly, and potentially ruin a deal. Make no mistake, learning how to do a comparative market analysis could save investors a lot of time and money.

Key Takeaways

• Learning how to do a CMA on MLS properties is a valuable skill no investor should be without.
• A properly calculated comparative market analysis will serve as the foundation for every deal.
• Comparable properties will give investors a good idea of how to value their deals, but there are other variables to consider.