Determining the appropriate price point for a home can be challenging, whether you're in the market to buy or sell. Many factors go into choosing a house's value, making it seem subjective. There is, however, a science behind pricing property. This is why real estate agents conduct a comparative market analysis (CMA).

What is the importance of Comparative Market Analysis (CMA) in real estate?

Comparative market analysis is a method used by real estate agents to determine the value of a particular property by comparing it to those that have recently sold in the exact location. Identifying a home's fair market value can be challenging since several factors go into determining how much it is worth.

When buying or selling a house, most people think about factors that influence the listing price, such as the location, square footage, and bedroom and bathroom counts. It is also essential to consider the condition of the housing market locally and nationally, as well as the property's age, condition, and features.

Analyzing comparative markets

Home sellers can choose the best listing price for their homes by using a comparative market analysis. It's important to avoid setting a price that would result in the seller going into debt, or that is so high that it would deter potential buyers from making a purchase. Therefore, there is no one-size-fits-all "best" price for a home. Buyers can use a CMA to verify that the home they are interested in is in the suitable price range and to determine whether their offer is competitive without being overly aggressive.

The purpose of a CMA is to determine whether a property is comparable to other homes in terms of location, size, and features.  The CMA should be based on recently sold homes in the same subdivision. Living in a low-volume or rural market can be challenging to find homes that sold in the last three to six months. If this is the case, it might be better to get a formal appraisal .

What does a comparative market analysis entail?

The real estate agent searches for homes as similar as possible to the subject property to conduct the analysis.

The comps are used to determine the price of a home using a sales comparison approach. Based on this approach, you can calculate the value of a home by determining how much it would cost to purchase a comparable property.

The Rule of Three

When preparing a CMA, an agent should find three recently sold homes (within the last six months, preferably three months ago). The three homes should be as similar as possible and located close together.

After selecting at least three comparable homes, each is carefully analyzed to identify its differences from the house in question. Similar properties are itemized and priced to determine how much they would cost in the current market if they were nearly identical.

Difference Between Appraisals and Comparative Market Analyses

Although comparative market analysis compares and identifies regional home values using similar housing market indicators, it is not an official appraisal. Unlike appraisals, which appraisers conduct to determine the value of a home, CMAs are performed by licensed real estate professionals.

Although the resulting value is an approximation that also includes the seller's or buyer's goals, conducting a CMA is intricate and demands technical expertise regarding the market and how different aspects of real estate can affect a property's value.

Taking Into Account Market Conditions

In general, market conditions are a wildcard when it comes to comparative market analysis and price setting. CMA values can fall due to a strong buyer's or seller's market. That's why it's a good idea to use recently sold homes as close to the current price as possible.

In gentrifying neighborhoods, comparable properties might be weaker now because housing prices can quickly change. When looking for a home in a rapidly appreciating neighborhood, remember that even if buyers and sellers agree on a price, a home appraisal will be required to secure financing.

What are the contents of a CMA report?

A real estate agent or broker will compile a report detailing the findings of a comparative market analysis. Although there is no standard CMA report, some states have statutes that require specific information to be included in CMAs.

However, a CMA typically includes the following:

• Three to five comparables and the property's address
• An overview of each property, including the elevation, floor plan, and number of bedrooms and bathrooms
• Each property's square footage
• Each comp's sales price
• Adjustments in dollars for differences
• Each comp's adjusted sold price per square foot
• The price range for the property is reasonable

Comparative market analysis: what does it involve?

A comparative market analysis is complex, but it can be broken down into manageable steps. By combining these parts, sellers, and buyers can get a comprehensive value estimate.

Initially, agents compile a list of three similar properties recently sold in the neighborhood. Agents can also use properties currently on the market or pending if there needs to be more sales data or if the potential purchase price of a home needs to be calculated. Prices that are too high for buyers can be demonstrated even in expired listings.

A CMA consists of the following components:

Location:  Similar properties to the subject property should be found in the same neighborhood. Suppose there must be more recent sales in the area to complete the CMA. In that case, the agent will choose comps  located in an area considered similar based on local school quality, crime rate, noise level, etc.

Lot size: A property's lot size affects its market value significantly. There can be a substantial difference in a home's price even if the lot size is only half an acre.

Square footage: Larger houses tend to be more valuable. Therefore, it is equally essential to consider livable square footage as the number of rooms.

Age and condition of the property: The age and state of the house, as well as whether it's been renovated, influence its value. Purchasing a newer construction or home constructed from high-end materials can be more valuable. However, historical homes that have recently been updated can be very expensive as well.

Number of bedrooms and bathrooms: A home with more bedrooms and bathrooms will have a higher value.

Special features: Added features such as fireplaces, patios, swimming pools, garages, finished basements, etc., are also taken into account. It's important to remember that not all special features will increase the value of a home, depending on the local market.

Date of sale:  Comps selected should have sold within the past three to six months. The market may fluctuate locally or nationally depending on inventory levels and interest rates. The sales price must be adjusted to reflect how the market has changed if the sale date is outdated.

Terms of financing and sale: Both the type of financing and the terms of sale can affect a buyer's purchase price. In some cases, buyer contingencies are acceptable, but only when the offer price is higher. A comp's purchase price must be reduced if seller concessions were included in its sale. Seller concessions may include paying the buyer's closing costs or repairing the house before selling it.

Comparative Market Analysis: How to Do It

There is much more to a CMA than just comparing recent sales prices. To create an accurate CMA, follow these steps:

1. Assess the neighborhood

CMAs should consider the neighborhood's general quality when setting a listing price or determining a home's value. Among other things, it should consider the block's attractiveness, community amenities, and HOA rules. The school's proximity and the house's curb appeal play an equally important role in inclusion.

2. Gather property details

Real estate agents or brokers who perform a CMA  review the existing listing (if one exists) and visit the property in person to gather information. As part of the home inspection process, they'll examine the home's size (particularly the size of the liveable space), age, style, construction, condition, layout, finishes, landscaping, upgrades , and updates.

3. Select Comps

Identify three to five comparable homes in the neighborhood that have sold recently, as close as possible to the home you are considering. It's ideal to find comparable properties in the same school district and within a mile of the property. Consider houses with similar square footage, lot size, bedrooms, bathrooms, and construction type. When comparing comparable properties, you should pay close attention to the date they sold: the more recent the sale, the better, since real estate prices can fluctuate rapidly.

4. Differences should be adjusted

The next step is adjusting for differences between the home and each comparable property. Each difference can be assigned a price, and the cost of each comparable can be adjusted accordingly by an experienced real estate agent or broker. It may seem counterintuitive, but if the comp has an inferior feature, its price is adjusted positively, and vice versa.

It is reasonable to assume that the buyer paid more for an extra bedroom in a comparable house (a superior feature). An apples-to-apples comparison can be achieved by deducting an amount from the comp to account for the spare bedroom. As a result, no changes are made to the target home's price.

5. Estimate the price per square foot after adjustments

Once the adjusted price of each comp has been adapted for differences, divide the adjusted price by the square footage of each comp to determine the sold price per square foot. Once the sold price per square foot of all the comps is added, divide it by the number of comps to get the average. To estimate the property's worth, multiply this average by its square footage.

Is a Comparative Market Analysis Necessary?

A comparative market analysis is essential to estimate the value of real estate. Homeowners can use a CMA to determine a reasonable asking price for their property by looking at the sales prices of similar homes in their area. Suppose you're ready to purchase a new home. In that case, you can also use a CMA to negotiate asking prices and create competitive offers.

The Bottom Line

It is generally recommended to use comps that are the most similar to the home, most recently sold, and require minor adjustments. Sometimes, the final price must be tweaked, depending on the market. Prices may be slightly higher during a hot market or low inventory. A price reduction may be necessary, however, if there are a lot of similar homes on the market.