Comparative Market Analysis: A Guide

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It can be extremely challenging to reliably estimate the fair market value of a home because there is a significant number of factors that go into determining how much a specific property is worth. When people think of factors that impact the price of a house, they typically consider location, square footage and the number of bedrooms and bathrooms. But the property’s age, condition, features, lot size, etc., as well as the conditions of the local and national markets affect the value of residential real estate as well. 

To price properties, real estate agents use what’s called a comparative market analysis (CMA). A comparative market analysis is an estimate of a home’s value based on trends in the housing market. The process of completing a CMA involves evaluating similar properties that have recently sold in the same area. Let’s take a look at what a comparative market analysis is and how it’s created, so you can gain a better sense of how an agent would determine the right purchasing price when selling your home or a competitive offer when helping you buy your next.

What Is A Comparative Market Analysis?

A comparative market analysis is a tool that real estate agents use to estimate the value of a specific real estate property. In order to conduct the analysis, agents search for recently sold homes in the same area that are as similar to the subject property as possible.

These homes, which are known as comps, or comparable sales, are used to conduct a sales comparison approach to pricing. This approach hinders on the presumption that you can figure out how much a home is worth by identifying how much it would cost to purchase a similar home that’s equally desirable.

Once at least three comps are selected, each one is thoroughly examined to pinpoint how it differs from the home in question. After the differences are itemized and priced out, the sales price of each comp is adjusted to determine how much it would cost if it was nearly identical to the subject property and sold in the current market.

Although a comparative market analysis uses similar housing market indicators to compare and identify regional home values, it’s not considered an official home appraisal. Home appraisals are conducted by appraisers to create home valuations, while CMAs are completed by licensed real estate professionals to estimate the fair market value. Even though the resulting value is an approximation that also incorporates the goals of the seller or buyer of the property, it’s a complex process that requires technical knowledge of the overall market and how various aspects of real estate impact how much a property is worth.

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What Goes Into A Comparative Market Analysis?

Although completing a comparative market analysis is a complex process, it’s broken down into separate, manageable parts. These parts collectively give sellers and buyers a thorough value estimate.

As discussed, analysis begins with agents compiling a list of at least three similar properties within the same area that have sold in the last 3 – 6 months. If there isn’t enough sales data or if the potential purchasing price of a home is being calculated, agents may also select properties that are currently listed on the market or pending. Even expired listings can be used to demonstrate the kinds of prices that are too high to attract interested buyers.

Here’s a list of the various components that go into a CMA:

  • Location: The best comps will be located in the same neighborhood as the subject property. However, if there haven’t been enough recent sales in the area to complete the CMA, the agent will select comps located in an area that is considered similar due to the quality of local schools, crime rate, noise level, proximity to amenities, etc.
  • Lot Size: The size of a property’s lot plays a large role in its market value. Differences in even .5 acre can have a substantial impact on a home’s price.
  • Square Footage: The larger the house, the more valuable it tends to be. Therefore, the extent of livable square footage can be just as important as the number of rooms within the home.
  • Age and Condition of Property: The year the house was built and whether it’s been recently renovated factors into the value. Newer constructions and homes built with high-end materials are often considered more valuable, though historical homes that have been recently updated can also have high purchasing prices.
  • Number of Bedrooms and Bathrooms: The more bedrooms and bathrooms a home has, the higher its value will be.
  • Special Features: Specialty features, like fireplaces, patios, swimming pools, garages, finished basements, etc. are also taken into consideration. However, it’s important to keep in mind that depending on the local market, not all special features will actually be viewed as increasing the home’s value.
  • Date of Sale: The comps chosen should have sold within the last 3 – 6 months. If sale dates are not current, sales prices must be adjusted to reflect how the market has changed. Market conditions may vacillate either locally or nationally based on the size of inventory and changing interest rates.
  • Terms of Financing and Sale: The type of financing a buyer uses to buy a home can impact the purchasing price as can the terms of sale. If a comp’s sale included seller concessions, the value of the concessions must be subtracted from its purchasing price. Such concessions may consist of the seller’s decision to pay the buyer’s closing costs or make repairs on the home prior to sale.

An Example Of A Comparative Market Analysis

Let’s look at a simplified example of how a comparative market analysis could help buyers. A couple is interested in purchasing a single-family home that’s listed for $450,000, but they want to negotiate the asking price. They ask their real estate agent to run a comparative market analysis on the home to help them come up with a competitive offer based on current market trends.

The agent begins by gathering information on the property the couple wants to purchase. The property is situated on a .5-acre lot in a subdivision that’s filled with houses that were built around the same time and possess similar floor plans. It has three bedrooms, two full bathrooms and one half-bath, one fireplace in the living room and a two-car garage. The 2,000-square-foot house is in good condition and does not require any major repairs, but unlike other homes in the area, the basement has been finished.

After obtaining this information, the agent then searches for comps in the area. Given the fact that the subdivision is quite large and has recently seen a lot of activity, the agent is able to find three comparable properties that have all sold in the last 6 months. While gathering information about the comps, the agent begins to put together the following comparative market analysis.

 

 

Subject Property

Comp #1

Comp #2

Comp #3

Price

 

$440,000

$433,000

$455,000

Date of Sale

 

3 months ago

5 months ago

6 months ago

Square Footage

2,000

2,200

2,000

2,200

Bedrooms

3

4

3

4

Bathrooms

2.5

3

2

3.5

Garage

2-car

2-car

2-car

2-car

Condition

Good

Worse

Good

Good

Lot Size

.5 acre

1 acre

1 acre

.5 acre

Basement

Finished

Unfinished

Unfinished

Unfinished

Other Features

1 Fireplace

2 Fireplaces

No Fireplace

1 Fireplace

 

With a clear list of the differences between the subject property and comps, the agent contacts a contractor to get a breakdown of the costs of each feature to determine how each difference affects the home’s overall value. (The prices below are only examples and should not be considered the true value of any item.)

 

Item

Estimated Value

Additional 200 Square Feet

$10,000

Bedroom

$4,000

Bathroom

$2,000

Improving Home’s Condition

 

$3,200

Additional .5 Acre

$5,000

Finished Basement

$3,000

Fireplace

$1,000

 

The sales price of each comp is then adjusted to see how much it would have sold for had it been nearly identical to the subject property. When adjusting the price, more desirable features are deducted from the sales price of the comp, while less desirable features are added to it. Then, the total adjustments are calculated for each comp, and the sales prices are adjusted accordingly.

 

 

Subject Property

Comp #1

Comp #2

Comp #3

Price

 

$440,000

$433,000

$455,000

Date of Sale

 

3 months ago

6 months ago

4 months ago

Square Footage

2,000

2,200

(-$10,000)

2,100

(-$5,000)

2,200

(-$10,000)

Bedrooms

3

4

(-$4,000)

3

4

(-$4,000)

Bathrooms

2.5

3.5

(-$2,000)

2.5

3.5

(-$2,000)

Garage

2-car

2-car

2-car

2-car

Condition

Good

Worse

(+$3,200)

Good

Good

Lot Size

.5 acre

1 acre

(-$5,000)

1 acre

(-$5,000)

.5 acre

Basement

Finished

Unfinished

(+$3,000)

Unfinished (+$3,000)

Unfinished (+$3,000)

Other Features

1 Fireplace

2 Fireplaces

(-$1,000)

No Fireplace

(+$1,000)

1 Fireplace

Total Adjustment

 

 

(-$15,800)

 

(-$6,000)

 

(-$13,000)

Adjusted Price

 

($424,200)

($427,000)

($442,000)

 

The adjusted sales prices of the comps reflect the range that an appropriate offer should fall in: $424,200 – $442,000. The agent then uses the process of reconciliation to determine the exact price that the couple will offer to purchase the subject property.

Through reconciliation, the agent weights each comp based on how similar it is to the property. Comp 1 had the most adjustments, so it’s given the lowest weight. Comp 2 had the fewest adjustments, so it’s given the highest weight. Once all weights have been assigned, the adjusted prices are multiplied by the weighted value, and the results are added together to determine the right offer.

 

Comp 1

$424,200 x .2

     $84,840

Comp 2

$427,000 x .5

+ $213,500

Comp 3

$442,000 x .3

+ $132,600

Indicated Offer

 

   $430,940

  

The agent would then round the total to the nearest $100. After gaining the couple’s approval, the agent would present the offer of $430,900 to the listing agent, using the CMA as proof that the house is actually worth a little over $19,000 less than ask.

Is A Comparative Market Analysis Right For You?

A comparative market analysis is a crucial tool for estimating the value of real estate. If you’re a homeowner who’s interested in listing your property for sale, a CMA will help you determine an appropriate asking price based on what sales prices similar homes in your area have received on the market. A CMA can also assist you in negotiating asking prices and coming up with competitive offers if you’re ready to purchase a new home.

But remember, preparing a comparative market analysis is a convoluted process that requires access to complete sales data and knowledge of local and national markets, which is why it should be completed by a licensed real estate agent. If you need assistance finding an experienced real estate agent, Rocket HomesSM Verified Partner Network can help pair you with the right agent based on your location and needs.

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