What do savvy real estate agents, real estate investors, and real estate appraisers have in common? They are all masters at analyzing real estate comps. Real estate comp analysis, also referred to as real estate market analysis or comparative market analysis (CMA), is a very crucial exercise in the real estate industry.
It is the process of determining the fair market value of a property being sold or bought by examining the prices of recently sold comparable listings in the same area (real estate comparables).
For sellers, knowing how much their home is worth will help them accurately price it. As a property buyer, this is a key step to analyzing investment properties for sale. By knowing the fair market value of an investment property for sale, you will be able to decide how much to offer. You will be able to assess whether the listing price of an investment property you are interested in is reasonable and avoid overpaying for it. This is key to finding great real estate deals.
Therefore, every real estate investor needs to know how to analyze real estate comps accurately before they begin their property search. If you are thinking of buying an investment property, here is a step-by-step guide to conducting a real estate comp analysis the right way.
Related: How Do You Find Real Estate Comps?
How to Do a Real Estate Comp Analysis in 4 Steps
Below are the key steps to follow when doing a comparative market analysis:
1. Analyze the Subject Investment Property
When running a CMA, the first step is to analyze the investment property under consideration. This involves examining all the qualitative and quantitative features of the subject property.
Since you will be looking for comparable properties, you need to gather as much data as possible about the investment property you want to buy or sell. This data will constitute the basis of your comparative market analysis. The more similar the real estate comparables are to the subject property, the more accurate the CMA will be.
Here are some of the key data to gather on the subject property:
- Location (housing market and neighborhood)
- Property type (single-family, multifamily, condo, apartment, townhouses, etc.)
- Year built
- Acreage
- Number of floors
- Square footage
- Number of bedrooms
- Number of bathrooms
- Amenities (balcony, swimming pool, garden, fireplace, parking space, etc.)
- Recent major renovations
- General property condition
Related: Where to Find Reliable Property Data for Your Real Estate Investment
2. Search for Real Estate Comps
You now have a good understanding of the investment property you are considering to buy. The next step in your real estate comp analysis is to examine recently sold comparable properties in the same area as the subject property.
You need to identify at least 3-5 real estate comparables that are located in the same housing market and neighborhood. Preferably, the comps should be located within a radius of 3 miles from the subject property.
However, assess the quality of the area to make sure that there is no significant difference in terms of proximity to social amenities, public transportation, curb appeal, etc. Residential areas may vary from block to block. This can lead to significant price differences. If the real estate comps are close enough, this shouldn’t be a problem.
As you look for the comps, keep in mind that they should have as many features as possible as the subject rental property for sale. This is the only way to ensure an accurate real estate comp analysis. Otherwise, you might underestimate or overestimate the market value of the subject property.
But how recent should the property sale be? Well, this will depend on local real estate market dynamics. However, try to find the most recent sale data since you are trying to find the current market value. This should be within the past 3 months. In a more stable housing market, you can extend the sale period up to 6 months if need be. However, keep in mind that the farther back you go, the less accurate your CMA will be.
Related: How to Do Comparative Market Analysis Step by Step
There are several other factors that will impact the value of an investment property, some of which we have listed above. Be sure to take as many of them into account when looking for comps.
How to Find Real Estate Comps
For most beginner investors, this is the most difficult part of real estate comp analysis. Yes, finding real estate comps and collecting the needed property data manually can indeed be overwhelming and time-consuming. If you are wondering how to find real estate comps without much of a hassle, there’s a better way. Mashvisor is the best real estate investment software for this purpose.
You can quickly and easily find real estate comps from the comfort of your house using Mashvisor’s real estate investment calculator. With this tool, you can get a list of readily available comps for any investment property on Mashvisor’s platform or off-market in the US housing market. This comparative market analysis tool has made real estate comp analysis easier than ever before.
Start out your 7-day free trial with Mashvisor now to find profitable investment properties for sale with readily available comps!
3. Find the Average Price per Square Foot for the Comps
You now have a list of real estate comps for your real estate comps analysis. Next, you need to get the average price per square foot. To do so, you first calculate the price per square foot for each comp. This is done by dividing the selling price of each comp on your list by its square footage. Then, add them up and divide the total by the number of comps.
To get a reasonable estimate of the price of the subject investment property for sale, you simply multiply the average price per square foot by its square footage.
4. Make Value Adjustments for Property Differences
While the value estimate you have found above is fairly reasonable, it’s not 100% accurate. The fact is that no two properties are exactly identical. Your comps may not exactly fit your criteria. There will always be differences.
Therefore, to determine the fair market value, you need to make appropriate adjustments to compensate for the differences between the comps and the subject property. This leads to the final step in your real estate comp analysis. The differences may be in bedrooms, bathrooms, garage, acreage, condition, etc. You should assign a value to each key difference and adjust the value of the subject property accordingly. Therefore, the estimated value could increase or decrease.
Moreover, the final value of the investment property should be modified based on micro market trends. For instance, compare the competitiveness of the real estate market now and when the comps were sold. Home prices tend to rise when demand increases. You can get an idea of how the current housing market is by examining current listings of comparable properties. Also, are there any developments near the subject property that would influence the property value? Put all the pieces together to find the final value estimate.
Related: 10 Factors That Affect Property Value (#7 Will Surprise You)
The Bottom Line
Knowing how to do a real estate comp analysis can be the difference between finding a great deal and losing money. While it’s not the same as an official appraisal done by a licensed real estate appraiser, if done correctly, it can help a real estate investor to find a reasonable estimate of the current market value of an investment property for sale. By analyzing real estate comps, you will be able to know when you are getting a fair deal.