Comparative Market Analysis: A Guide

Victoria Araj7-minute read

October 21, 2020

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Take two houses that were built 20 years ago, in the same style by the same builder in the same neighborhood. Let's pretend these two houses go on sale today. They should be priced the same, right

Clearly, we’d need to know more, such as:

  • What’s happened to those two homes in those 20 years?
  • Has one been lovingly cared for, added on to, and renovated to keep up with the times while the other has fallen into neglect and disrepair?
  • When you say “same neighborhood,” do you mean same school district?
  • Is one house on a now much busier street while the other is on a quiet side street?
  • Is one on the fringe of the neighborhood while the other is in the heart of it?

One of the challenges facing real estate agents, buyers, sellers and lenders is figuring out how much to ask and how much to offer for a home. That’s why a comparative market analysis (CMA) is such an important tool.

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 by evaluating similar ones that have recently sold in the same area. It can be extremely challenging to reliably estimate the fair market value of a home because there are 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 and so on, as well as the conditions of the local and national markets affect the value of residential real estate as well.

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How Is A Comparative Market Analysis Prepared?

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 relies on the premise that you can figure out how much a home is worth by identifying how much it would cost to purchase a similar home of equal desirability.

The Rule Of Three

The first step for an agent preparing a CMA is to find three homes that have sold recently (within the past 6 months at most, but preferably 3 months). These three homes should be as similar and located as closely together as possible.

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.

Understanding How They Differ From Appraisals

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. Whereas home appraisals are conducted by appraisers to create home valuations, 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, a CMA is 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.

Taking Market Conditions Into Account

Market conditions are a wild card with comparative market analysis and price setting in general. That’s why it’s best to use homes that have sold as close in time to the home currently being priced. A strong buyer’s or seller’s market might upend CMA values.

For example, a rapidly gentrifying neighborhood might not have strong comparables because housing prices can change dramatically within just a few months. If you’re looking for a home in a rapidly appreciating neighborhood, just remember that even though buyers and sellers may come to an agreement on price, in order to get financing, an appraisal will be needed to determine if that price is justified.

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.

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 and so on.
  • Lot size: The size of a property’s lot plays a large role in its market value. Differences in even half an 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 and so on 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 purchase a home can impact the purchasing price, as can the terms of sale. Buyer contingencies might be accepted, but only if the offer price is higher. 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.

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A Comparative Market Analysis Example

Let’s look at a simplified example of how a comparative market analysis could help a buyer. 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 and finds the following information:

  • The property is situated on a half-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.
  • It has a 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.
  • 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.

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.)

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, and less desirable features are added to it. Then, the total adjustments are calculated for each comp, and the sales prices are adjusted accordingly.

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.

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 the asking price.

Do You Need A Comparative Market Analysis?

A comparative market analysis is a crucial tool for estimating the value of real estate. If you’re a homeowner who is 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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Victoria Araj

Victoria Araj is a Section Editor for Quicken Loans and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.