Comparative Market Analysis Explained
What is a Comparative Market Analysis?
A comparative market analysis, often referred to as a CMA, is a real estate agent’s estimate of market value based on recent sales of similar homes in the same neighborhood. A CMA is useful for sellers to determine a list price for their home, and for buyers to come up with a reasonable dollar amount when submitting an offer to purchase.
Finding Comps with Similar Features
The key to an accurate CMA is finding comparable sales, known as comps, that are as similar as possible to the subject property (the home that is being valued). Unless the subject property is in a cookie-cutter neighborhood with identical floorplans and features, finding good comps can be challenging. The real estate agent will use the details and photos in the multiple listing service to find comps that are similar to the subject property based on the following criteria:
- Same property type
- Square footage = +/- 15%
- Number of beds and baths
- The year built
- Type of construction
- Lot size
- Overall condition
- Property features: pool, summer kitchen, waterfront, impact windows etc.
Making Adjustments for a Comparative Market Analysis
Adjustments may need to be made to increase or decrease the sale price of a comp to account for home features. For example, if the subject property has a pool, but the comp being used does not, the agent would add the average value for a pool in that neighborhood to the comp’s sale price. This is where your agent’s knowledge of the neighborhood makes a world of difference. There is no standard adjustment for a pool, your agent will need extensive knowledge of your market to adjust accordingly.
Neighborhood Comps: Proximity is Key
Agent expertise is also essential in determining the area that will be covered in a comparative market analysis. Home values can differ drastically within neighborhoods that border one another. If the subject property is in a gated community with an HOA, it is best to stay within that community. The closer to the subject property the better, but a general rule of thumb is to stay within half a mile from the property in the same city and school district. However, if the home is located in a rural area, the agent may need to go a mile out to locate comps.
Use Recent Comps
Another important consideration in finding good comps is the sale date. The more recent, the better, especially in a changing market. Ideally, there will be enough recent sales that your agent will only have to go back three to six months. However, if there haven’t been a lot of sales in the neighborhood, your agent might need to look at sales over the past year. Only properties that have closed can be used as a true comp. However, it’s a good idea to look at active listings to ensure that you are pricing the property competitively. Listings that are pending, meaning they have gone under contract with a buyer but haven’t closed yet, can also provide useful information. The actual sale price of a pending listing is unknown until closing occurs, but looking at how many days it took the property to go under contract at the list price is useful in determining a list price.
CMA vs Appraisal
Once your agent has located four to ten comps and has made adjustments for home features, you will be provided with a range of market value. It’s important to note that a CMA is not the same as an appraisal. An appraisal is conducted by a neutral third party that is licensed by the state. If you receive an offer on your home that is financed, the bank will order an appraisal to ensure that they are not issuing a mortgage that is greater than the market value. Oftentimes, cash buyers will order an appraisal for their own peace of mind as well. While the process for a CMA and an appraisal is similar, an appraisal provides a more detailed analysis.