Wouldn’t it be nice to know the future of your investment property before closing a deal and getting yourself involved? Well, your prayers have been answered with comparative market analysis (also known as real estate market analysis).
What is a comparative market analysis? Why is it important that real estate investors conduct comparative market analysis? And how is CMA performed? All these questions and more will be answered throughout this post.
Related: Become an Expert on Comparative Market Analysis with Our Guide
What is comparative market analysis?
The goal of a comparative market analysis (CMA) is to estimate the value, or price, of an investment property by comparing it with other properties with similar features. CMA is part of the property valuation process and its ultimate job is to determine the property market value.
Some may confuse comparative market analysis with a home appraisal, and even though both deal with property value, they are completely different. The estimated appraised value can only be given by a licensed professional appraiser. The value obtained has legal and financial implications. On the contrary, a comparative market analysis that you conduct has no legal or financial value beyond helping you determine the value of your investment property within a certain market for your research purposes. Anyone can conduct a comparative market analysis if they have the required data. No professional license is required.
Related: Real Estate Market Analysis vs. Home Appraisal: What’s the Difference?
Why is comparative market analysis so important?
Every real estate investor, especially beginner real estate investors, needs to know a property’s estimated value before buying or selling the property. Comparative market analysis is important because it prevents property investors from falling into real estate investment pitfalls and ensures a successful real estate career. Both buyers and sellers benefit from comparative market analysis. Let’s take a look at the advantages for each one.
Benefits of comparative market analysis: The seller
Sellers need to know how much their property is worth in the US housing market. A comparative market analysis is needed to set the right market price to guarantee that the seller sells the property and makes a profit in return. Setting the price too high will result in scaring away buyers and if you have a vacant property, the result could be negative cash flow. Setting the price too low will make you miss out on a high return on investment.
Benefits of comparative market analysis: The buyer
A common mistake made by beginner real estate investors is overpaying for a certain investment property. Buyers need to conduct comparative market analysis and find the value of an income property in order to avoid making the mistake of overpaying for the investment property.
Another great thing about conducting CMA is that buyers won’t miss out on other investment deals. For example, when the buyer knows that the property is below market value and purchases it for a cheap price, then he/she can use it to get a good return on investment by flipping the property. It’s because the buyer knew beforehand the property’s value that such a deal succeeded.
How to perform comparative market analysis
Performing comparative market analysis is easy and can be conducted by any real estate investor. Let’s briefly explain the process.
Related: How To Perform A Real Estate Market Analysis
Comparative market analysis step 1: analyze the investment property
The first step you want to do is to analyze the investment property according to its characteristics. What characteristics make up an income property? Well, you should take into consideration many factors such as its size (square footage), the number of bedrooms, the age of the property and the number of floors.
Also, you want to take into consideration the characteristics that might affect the value of your investment property such as swimming pools, garage or any other extra features or amenities.
Comparative market analysis step 2: find comparable properties
The next step is to find investment properties that you can compare your own property to. You want to find 3-5 recently sold comparable properties in the same location that share the same characteristics as your target investment property. In real estate, these “comparables” are commonly known as real estate comps. Normally, you should find comparable properties which were sold within the past 3-6 months and are within a 1-3 mile radius from your property.
Real estate investors can find real estate comps in sold listings, expired listings, pending listings, and current running listings. Mashvisor can also help you find real estate comps to conduct your comparative market analysis.
Related: How to Easily Find Real Estate Comps
Comparative market analysis step 3: compare the properties
The final step is to actually compare the properties you have found and collected the necessary data on. You want to do the calculations for CMA to get the property’s value. The main method for calculating the value of your investment property uses the price per square footage.
To estimate the price per square foot, property investors simply take the selling price of the investment property and divide it by the home’s square footage. You must do this for all the real estate comps you picked. Then you take the sum of each property’s price/square footage and divide it by the number of properties. This should give you the average price for all the comparable properties. Multiply this by the square footage for your investment property and you have the value. For a clear example of this read: Comparative Market Analysis in Real Estate Investing: The Ultimate Guide.
Tip #1: hire a real estate agent
Comparative market analysis can be done on your own without the help of anyone. However, to ensure that you get the most accurate results, your real estate market analysis should be done by a professional real state agent. They have the knowledge and experience in the housing market needed to help you analyze the market and find the perfect real estate comps. If you are wondering where to find a real estate agent, Mashvisor can help you find a real estate agent to match your needs.
Tip #2: carefully select real estate comps
Like I said before, to conduct comparative market analysis you need to find income properties that share similar features with your target property. These comparable properties should be in the same area and were recently sold properties. Carefully select real state comps that fit these qualifications to ensure that you are getting the most accurate results and make smart investment decisions.
Tip #3: adjust the value
Adjust the estimation of your investment property’s value for the difference between real estate comps before you start comparing. Also, consider property financing as it could influence the selling price. Plus you don’t want to forget to adjust prices depending on the current market conditions as they are always changing.
The bottom line
For every real state investor, knowing the value of an income property is important to make smart investment decisions and find the best properties to invest in. A comparative market analysis is the key to a successful real estate investing career. For beginner property investors, this might seem like an overwhelming process, but with experience, conducting comparative market analysis will be a piece of cake.
Be sure to check out Mashvisor as we provide property investors with the best real estate investment tools that make performing comparative market analysis a simple process. Click here to start analyzing investment properties in any state, city, and neighborhood of your choice throughout the US housing market!