Knowing the value of a real estate property is a great advantage when deciding to buy a real estate investment property. Comparative market analysis allows real estate investors to have an initial idea about the value of a real estate property without the need of a formal real estate appraisal. So, what is comparative market analysis, and how can you as a real estate investor use it as a tool to buy the best real estate investment property?
What Is Comparative Market Analysis?
Comparative market analysis, or CMA, is the process of examining the prices of recently sold real estate properties in the same location, in order to estimate the value of a real estate property. CMA is a less complicated version of a formal, professional appraisal. Therefore, it is considered to be a good starting point for real estate investors when offering a price to buy a real estate property. Additionally, comparative market analysis is also used as a benchmark for real estate valuation.
To fulfill its purpose, comparative market analysis examines real estate properties that are similar to each other and share the same features. In reality, no two real estate properties are exactly the same, but this approach provides a reasonable estimation of the property value that can help real estate investors make decisions and negotiate the best deals when it comes to buying a real estate property.
When Is Comparative Market Analysis Handy?
Let’s say you find a real estate investment opportunity, but you’re having doubts concerning the price asked for it, or you are not sure how much to offer. Hiring a professional real estate appraiser to value your investment opportunity is an option, but it comes at a cost. On average, the cost of a home appraisal for a single-family home ranges between $400 and $500. So, if you are comparing multiple real estate investment opportunities, it is more convenient to avoid a formal appraisal method and use comparative market analysis!
Nevertheless, a professional and formal home appraisal is an important component in the loan process as it plays a role in how much a bank is willing to lend you for your real estate property financing. In fact, mortgage lenders require an appraisal to determine the real value of the real estate property, which can be different from the listed value or the negotiated price. The purpose of an appraisal is to assure lenders that the real estate property is worth the money they are lending you. However, in the initial stages, comparative market analysis is sufficient to determine whether or not you are getting a good deal.
Related: Real Estate Investing: How to Find the Best Investment Property
How to Conduct Comparative Market Analysis?
Comparative market analysis can be done by a real estate agent or even a real estate investor to give you a solid opinion (closest possible to real value) on how much the real estate property is worth. It works as follows:
1- Perform investment property analysis
Before comparing the property in question with other real estate comparables (real estate comps), it is important to perform investment property analysis to define the property and to determine the different features that will be compared with other similar properties. The investment property analysis includes aspects such as:
- Location of the real estate property
- Square footage of the property and its land area
- Age of the property
- Number of bedrooms and bathrooms
- Amenities and special features: built-in appliances, a swimming pool, size of garage, size of yard, fireplace, balconies, etc.
After performing investment property analysis, you will have sufficient information to identify similar real estate properties in your area that can be used in the comparative market analysis.
2- Find comparable properties
When searching for comparable properties, it is recommended to search for real estate properties within a radius of 1-3 miles of the property in question, and preferably sold within the past 6 months. Efficient comparative market analysis includes 3-5 comparable properties that are similar in terms of the aspects mentioned above.
Comparative market analysis generally uses sold properties (sold listings) for the valuation process, but sometimes similar sold listings are not available, which forces a real estate investor to include currently listed (active listings) properties to the analysis. An active listing’s price only indicates what the property seller hopes to get for the real estate property and does not necessarily reflect what it is actually worth.
Tip: Use Mashvisor to obtain active listings as well as sold listings.
Related: How to Easily Find Real Estate Comps
3- Adjust price of comparable properties
After finding the desired comparable properties, you might want to make some adjustments in the price to account for differences between the comps and the real estate property in question. An experienced real estate investor would know how much to decrease or increase the property price.
4- Compare the properties
Once you have adjusted the comparable properties sold prices, divide each price by its square footage to get the sold price per square foot. Then take the average of the comparable properties you have so that you end up with one average price per square foot. Finally, multiply that by your subject property’s square footage to get its estimated market value.
The Bottom Line
Using comparative market analysis to make real estate investment decisions is a good strategy, especially when negotiating a real estate investment deal. As a real estate investor, knowing the value of the real estate property you are about to buy is very important since property sellers usually ask for a price higher than what a real estate property is worth. Therefore, knowing the value of a property is the key to succeed in real estate investing. However, remember that comparative market analysis is only an opinion of the real estate value and cannot to be used as a formal appraisal.
To learn more about real estate investing, keep reading on Mashvisor.