Comparative market analysis (CMA): A guide

When you’re in the market for a new home or looking to sell your current one, figuring out how much to offer or ask can be a considerable challenge. How much a house is worth can seem fairly subjective, considering how many factors go into determining it. However, pricing property is a science. That’s why real estate agents conduct a comparative market analysis (CMA).

What is a comparative market analysis (CMA) in real estate?

A CMA is a tool real estate agents use to estimate the value of a specific property by evaluating similar ones that have recently sold in the same area. It can be 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 who are buying a house or selling their home think of factors that impact the listing price, 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 housing markets, also affect the value of residential real estate.

CMA vs. appraisal

although a comparative market analysis uses similar housing market indicators to compare and identify regional property values, it’s not considered an official home appraisal. While home appraisals are conducted by appraisers to create home valuations, CMAs are completed by licensed real estate professionals to estimate the fair market value.

Although 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.

How is a comparative market analysis prepared?

To conduct the analysis, real estate 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 properties – are used to conduct a sales comparison approach to pricing. This approach relies on the premise that you can figure out a home’s worth by identifying how much it would cost to purchase a similar property 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 were nearly identical to the subject property and sold in the current market.

Account for market conditions

Market conditions are a wild card with comparative market analysis and price setting in general. That’s why it’s best to use comparable homes that have sold as recently as possible. Also, a strong buyer’s or seller’s market might upend CMA values.

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

Components of a CMA report

Although completing a CMA is a complex process, it’s broken down into separate, manageable parts. Collectively, these parts give sellers and buyers a thorough value estimate.

The 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 sale 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 prices that are too high to attract interested buyers.

Let’s take a look at a variety of 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’s 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. A slight difference in lot size 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 the 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 tends to 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 aren’t current, sales prices must be adjusted to reflect how the market has changed. Market conditions may waver, 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 to the home prior to sale.

A comparative market analysis example

Let’s look at a simplified example of how a CMA could help a home 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 doesn’t require any major repairs.

• Unlike other homes in the area, the basement has been finished.

After obtaining this information, the agent searches for comps in the area. Since 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 CMA.

With a clear list of the differences between the subject property and comps, the agent contacts a contractor for 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: $425,200 – $442,000. The agent then uses the process of reconciliation to determine the exact price 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 home buyers’ approval, the agent would present the offer of $431,600 to the listing agent, using the CMA as proof that the house is actually worth a little over $18,000 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’s interested in listing your property for sale, a CMA will help you determine an appropriate asking price based on the sales prices similar local homes on the market have received.

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.

The bottom line

A real estate CMA takes various factors into account to estimate a home’s market value, and it accounts for its unique components as well. Market conditions also play a part in an agent’s final analysis. 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 professional.

Once you’ve found a home within your price range, start your mortgage application with Rocket Mortgage^®.