Estimating the value of a home when you’re looking to buy a new home or sell a home can be difficult. In addition, the various criteria for calculating how much a property is worth may appear arbitrary. However, accurately pricing property is possible if you know the specific steps to follow, which is why real estate agents study and perform a comparative market analysis (CMA).
It's challenging to perform an accurate and consistent CMA. Many agents join the real estate industry without knowledge of this critical skill because it is rarely covered in pre-license real estate courses. That’s why we’ll explain the CMA real estate term and walk you through the steps of conducting a CMA.
What is a CMA in Real Estate?
A comparative market analysis (CMA) is a method that real estate agents apply to determine the worth of a specific property by comparing it to similar ones that have recently been sold in a nearby location. Because various factors affect the value of a particular home, it may be difficult to accurately assess a property's fair market value.
When people are buying a home or selling their home, they typically consider the factors that impact the price and affect the value of the residential real estate. Some examples of what they may consider are:
- Square footage
- Number of bedrooms and bathrooms
- Lot size
- The conditions of the local and national markets
A CMA helps sellers determine the “best” listing prices for their homes. The price considered the “best” is not too low that you don’t get as much money as you should and not too high that it prevents the house from selling entirely. For buyers, a CMA can confirm whether a property has a fair value and help determine a fair, competitive offer that will be taken seriously.
Although a CMA is similar to an informal appraisal, real estate brokers and agents don't always require an appraiser's license to conduct a CMA while assisting buyers and sellers. However, failing to complete a CMA correctly in certain states may hold real estate agents and brokers accountable. The agent must answer to the state's real estate licensing commission and risk disciplinary consequences if this occurs.
How to do a Comparative Market Analysis
Next, let’s go over how to do a CMA. The term “subject property” in a CMA refers to the property for which you determine the market value. Since comparison is a critical component of a CMA, we must first fully understand the subject property to identify other comparable properties with which to compare it.
However, a CMA entails considerably more than simply comparing the prices of recently sold properties in the area. The most precise way to determine a home's value is to hire a real estate agent to create a CMA report in the targeted neighborhood because they will have access to more data points and expert knowledge of the industry. They achieve this by following specific steps for creating an accurate CMA.
Step 1: Evaluate the Neighborhood
The first step is to get familiar with the area where the subject property is located. Note important features, such as proximity to any amenities, ranking of the local schools, most attractive blocks, curb appeal, and any possible disturbances, like active train tracks or busy streets.
Step 2: Analyze Data of the Subject Property
Next, develop an in-depth description of the subject property, providing detail on various data points, including the property’s age, square footage, lot size, condition, layout, style, landscaping, and upgrades. Having as much information as possible on the subject property will help you later in making more accurate comparisons.
For further important insights into what the market has or hasn’t supported for the property in the past, analyze the subject property’s previous sale and listing history. This will also help in estimating the home’s value relative to the movement of the entire market since the last time the subject property changed hands. Gather all the information you can about your subject property’s previous sales and listings, such as the previous list and sold prices, price adjustments, and days on the market.
Step 3: Select Comps
The next step is to find three to five similar homes that local sellers recently sold and are as close to the subject home as possible. Relevant comparable sales, or “comps,” are properties whose main features are the same if not extremely similar to those of the subject property. The best comparable properties have recently been sold, ideally within the past six months, because real estate prices can fluctuate rapidly and are as similar as possible in style, size, quality, and construction type. The comps should also be within the same school district and, ideally, not further than a mile away.
Step 4: Adjust for Differences
Now that you have assessed the subject property and comps, it’s time to evaluate and adjust for the differences between the two. An experienced real estate agent or broker can determine a dollar value for each difference and adjust the value of each comp appropriately.
Moreover, suppose the comp has a feature superior to the subject property’s, such as an additional bathroom. In that case, it’s reasonable to assume that the buyer paid extra to get the other bathroom. You would then deduct an amount from the comp to account for the spare bathroom to allow for a valid comparison. Keep in mind that the value of the target home is never adjusted.
Step 5: Determine Sold Price per Square Foot
After the price adjustments have been taken into consideration, calculate each comp’s price per square foot by dividing the adjusted price of each comp by its square footage. Then, add the sold price per square foot of all the comps, and divide by the number of comps to get the average.
Step 6: Calculate the Subject Property’s Value
Finally, calculate the estimated fair market value by taking the comparable property’s average price per square foot and multiplying that by the subject property’s square footage. You may have to adjust this price depending on how similar the comps are and other market trends.
For more information on comparative market analysis (CMA), take a real estate course from one of the most experienced and trusted online schools in the United States.
Written and Published by: VanEd