Whether you’re in the market to buy or sell real estate, the house value will probably be your first concern. When buying a home or investment property, you’ll need to check the property’s value before making an offer to make sure the house is fairly priced. Alternatively, one of the first steps when selling a house is to set the right listing price that will draw buyers without missing out on potential profits. There are a number of property valuation methods, but the most common and accurate way to pinpoint house value is to run a thorough comparative market analysis (or CMA for short).
What is a comparative market analysis, you ask? This is basically an in-depth report on a property’s current value. It’s prepared by analyzing the prices of similar homes (also known as comparables) in the area or housing market. Real estate buyers, sellers, and agents run a CMA either to determine the market value of a home for sale before making an offer or to figure out a price range for the home before listing it on the market. Hence, successful real estate investors always do a CMA before moving forward with real estate deals. But how exactly do you run a CMA?
In this how-to guide for investors, we go over how to do a comparative market analysis following these 5 steps:
- Gather necessary data on the subject property
- Assess the quality of the neighborhood
- Search for comparable property listings
- Calculate the price per square foot
- Adjust the house value for property differences
Step 1: Gather Necessary Property Data
The first step in a real estate CMA is learning as much as possible about the income property that you’re planning to buy or sell. To run a thorough comparative market analysis, you should be comparing apples to apples. While that’s an overused phrase, it’s still important. It means that if you want an accurate estimation of a property’s value, you’ll need to look for properties that are as similar as possible to it. And to find such properties, you first need to know everything you can about yours. As you would expect, the more characteristics you know about your investment property, the easier it becomes to find real estate comps and, thus, the more accurate your CMA will be.
So, start by collecting property data such as:
- Location (street, neighborhood, municipality, county)
- Acreage (if privately owned)
- Square Footage
- Number of Bedrooms and Bathrooms
- Year Built
- Recent Renovations
- Interior Finishes of Note
- Extraordinary Features (like swimming pool, pole barn, etc.)
Some real estate experts also advise gathering tax information and including it in your comparative market analysis report. This is because property taxes are not created equal. There are different tax rates, so it’s good to know your rate when considering comparable properties. In addition, real estate investors often think of property taxes as part of out of pocket expenses required to operate an investment property (in the same category as maintenance, insurance, utilities, etc.). Such expenses affect home values conversely – that is, the higher a tax rate, the lower the value of a home. It’s definitely not the utmost important factor of property valuation, but something worth considering.
Another piece of information to collect is the property’s previous sale and listing data in the last five years. This kind of data includes listing price, final sales price, any price adjustments, terms, and days on market. Gathering this property data is important for your own comparative market analysis because it indicates what the real estate market will bear for that investment property. For example, say that the last time this house was up for sale, it spent longer days on market and the listing price was reduced before it went under contract. This suggests that the property was priced a little too high.
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Step 2: Assess the Quality of the Neighborhood
The most important factor in determining the market value of a property for sale is the market itself. Real estate investors know that the quality of the location or neighborhood affects house values and prices. Hence, the second step of a comparative market analysis is to evaluate the quality of the neighborhood where you plan to buy or sell. If you know how to research real estate markets, this should be an easy step. Essentially, you need to identify the positive and negative features of the location and how they impact house values. You can do that using Google Street View or in person. Experts, however, recommend assessing the neighborhood in person as online images might be outdated. Among the things you should look at for your assessment are:
- Proximity to amenities like beaches, parks, schools, etc.
- Proximity to unpleasant locations like garbage dumps, highways, industrial facilities, etc.
- Nice blocks vs less attractive blocks
- Significant curb appeal issues
Related: What Kind of Neighborhood Has the Best Investment Properties?
Furthermore, it’s essential to have knowledge about the historical and current sale and rental values in the neighborhood when doing a real estate market analysis. This gives property investors an idea of how the neighborhood is performing for real estate investments. Find out if housing market trends are going up or down regarding home prices, home sales, rental rates, housing inventory, and demand for real estate. You also need to keep up with what’s currently happening in the neighborhood that might drive house values and prices up or down. For example, say a major road renovation is currently taking place down the block from your subject property. This is going to drive the final number on your own comparative market analysis down.
Step 3: Search for Comparable Properties
After understanding your subject investment property and the local housing market, you can now search for and find real estate comps. This is the most important step of a real estate comparative market analysis. As already mentioned, comparing apples to apples is crucial for the accuracy of a CMA, so you need to make sure you’re selecting the right properties as comps. Otherwise, you might overestimate the house value or, worse, undervalue its worth.
What are comps in real estate and how do investors find them? Real estate comps are simply listings that are similar to the property you’re dealing with. They might be recently sold, active, pending, expired listings or off market properties. Looking at these listings tells you what the market value of a similar house is.
Typically, investors take the following into consideration when choosing real estate comparables:
- Location: Residential areas can vary from one block to the next. In the same neighborhood, some properties might be located next to a quiet park and others next to a busy road. Subtle changes like this can lead to major price differences. Therefore, the location of comparables should be as close as possible to the subject property. Some real estate investors use a 5-mile radius within a metro area and a 25-mile radius in rural areas.
- Type and Amenities: Say you’re investing in single family homes and decided to sell one. To find its value, you need to compare it to other single family homes and not condos, for example. Also, it’s best to evaluate properties that have the same amenities (either on-site or in the neighborhood). For example, if you’re analyzing an investment property that’s in a gated community and has an in-ground pool, compare it to other real estate listings with similar amenities to get much more accurate results.
- Date of Sale: Make sure your real estate comparables are recent. Stay in as current a time frame as possible. Experts recommend that you stick within a three month period – the further out you go, the less useful the information. Plus, if you go back to more than three months, you’ll need to make adjustments for comparative market analysis as market conditions are consistently changing and affecting house values.
- Size/Lot Size: A real estate comp’s square footage should be within 15% of your subject property. For example, if you’re selling your 2,000 square feet home, look for comparables between 1,700 and 2,300 square feet. Much larger homes will sell for more and much smaller homes will sell for less. Similarly, property on 10 acres of land is going to be worth more and sell for more than an otherwise comparable home on just one acre.
- The Number of Bedrooms & Bathrooms: These are other factors that impact the house value. For example, two-bedroom homes are generally less desirable than those with three or more and, hence, have lower values. The same goes for homes with only one bathroom or no master bath. So, homes with three or even four more bedrooms and bathrooms than your house are not a strong comparable.
How to Find Real Estate Comps
Finding real estate comps and collecting all their property data for an accurate CMA can be time-consuming and overwhelming. This is especially true for beginner investors. Fortunately, there are real estate investor websites that allow you to search for and find comps online without leaving the comfort of your home. If you’re looking for a reliable comparative real estate analysis software, check out Mashvisor. Using our property search tools, you can find the best investment property for sale in your city or neighborhood of choice and get access to its data. Then, as you start analyzing the investment property using the rental property calculator, you can see a list of recent sales of similar properties in the area.
Related: How to Do Comparative Market Analysis with a Rental Property Calculator
When you download a property report, you’ll also obtain data (both traditional and Airbnb data) and details about the property itself and its comparables such as their characteristics, taxing info and history, sales history, owner info, a breakdown for the expenses, and much more! Start out your 14-day free trial with Mashvisor now to find profitable investment properties for sale with readily available comps!
Step 4: Calculate the Price per Square Foot
After all the hard work you’ve done, you should have a list of comparable properties for your real estate investment analysis. Now that the heavy lifting is done, the rest should be easy. The next step is to simply get an average price per square foot from these real estate comps. To do so, you need to divide the selling price of each comparable you’ve chosen by its square footage. This is how you’ll find the price per square foot for each property. Then, simply find an average price per square foot for all comparables and multiply that number by the exact square footage of the property you’re performing the CMA for. Voila, now you have landed yourself at a reasonably accurate price.
Let’s run a scenario to explain this better. Say you’re preparing a comparative market analysis report for buying an investment property that has a square footage of 2000. After doing your search for real estate comps, you now have the following list of comparables:
- Property #1 is 2100 square feet and sold for $400,000 ($190 price per square foot)
- Property #2 is 2000 square feet and sold for $390,000 ($195 price per square foot)
- Property #3 is 2200 square feet and sold for $410,000 ($186 price per square foot)
- Property #4 is 2050 square feet and sold for $395,000 ($192 price per square foot)
Based on these numbers and property data, the average price per square foot for these homes is $190. Now, all you have to do is multiply that number by your investment property’s square footage (2000) and you get $380,000. According to experts in CMA, this should be a fairly accurate estimate of the sales price for your subject property.
Step 5: Adjust Value for Property Differences
When comparing real estate properties, there will always be differences no matter how similar they may be. Thus, the last step in how to do a comparative market analysis is to make the appropriate adjustments on your estimation of the subject property’s value to compensate for any differences. For example, you’re doing a CMA for a two-bedroom property and have a real estate comparable that is similar to it in every way except that it has three bedrooms. In this case, you should assign a value to that extra bedroom and then adjust your property valuation accordingly. You can add or subtract value for structural differences such as the lot or acreage size, as well as feature differences like bedrooms, baths, garage, etc.
The final house value should also be modified depending on how competitive the real estate market was at the time of the sale compared to now. For example, say one comparable was sold in a period with very low housing inventory but the current real estate market has significantly higher inventory. In this case, you may need to adjust your CMA estimations down a bit (higher inventory force prices down). The opposite holds true – if there are fewer investment properties for sale available currently than the time of sale, you may adjust your price upward.
Finally, before coming to a final conclusion, real estate investors should visit the house in person. This will reveal any details that you might have missed which could affect the investment property’s market value. For example, you might discover negative points or hidden issues like cracks in the foundation. You should also take this opportunity to ask about recent repairs or any additional home renovations and estimate how much value they added. Make sure to understand what the exact condition of the investment property is and to account for anything you found in your adjustments for comparative market analysis to get a final accurate estimation.
Related: Become an Expert on Comparative Market Analysis with Our Guide
Final Words on Comparative Market Analysis
Real estate sellers and buyers ponder over the question “how do I find out what my house is worth?” and leave it to a real estate agent to give them an answer. However, you can answer this on your own by doing a CMA. As the comparative market analysis definition explains, it’s all about comparing your property to similar ones in your area. If you’re able to understand the basics of how to run a thorough comparative market analysis in real estate, you’ll be able to master it eventually.
Besides, property investors now have access to real estate investment tools and software that allow them to do a comparative market analysis online – one of which is Mashvisor. With the numerous tools you’ll be able to use when you sign up, running a CMA won’t be such a long task anymore. Find investment properties and their data, run a neighborhood analysis, find ready-to-use real estate comps, run the numbers, and make faster and smarter investment decisions using Mashvisor! To start your own comparative market analysis using our tools, sign up now!