What’s a Comparative Market Analysis?
The adage “look before you leap” can be life-changing advice, especially when you need to make strategic decisions. When you spend extra time researching a new product or venture, you can make the best choices.
In real estate investing, this is especially valuable since buyers need comprehensive insights like a fair sales price to acquire wealth-building properties. Determining which property is favorable for your investment needs requires careful analysis of a home’s fair market value. This is why every investor should request a real estate market analysis of any property that strikes their interest.
What is a real estate market analysis, and why should investors not skip this important step? This guide from Marketplace Homes will explain what it is and why it benefits every buyer during a real estate transaction.
What is a Real Estate Market Analysis?
A real estate market analysis is also known as a CMA (comparative market analysis). It’s essentially a list of comparable properties (aka “comps”) that makes a case for a listing’s market value. Though there is no standard number of comps required, three to five comps are the typical rule of thumb.
- Curious about what your home is worth? Estimate your home value right now. This is an excellent tool for homeowners to get the fairest valuation of their property so they can know its fair asking price for home buyers.
A real estate agent or licensed appraiser can draft a quick CMA by assessing all comparable properties that recently sold in a property’s same neighborhood. The most comprehensive data is found on the multiple listing service (MLS).
If there aren’t enough sold properties on record, then your realtor may also include active and pending listings, though this should only be used when other acceptable comps aren’t available. The market values in the analysis depend on a variety of complex factors, such as:
- Location
- Lot Size
- Condition
- Amenities (e.g. shopping, entertainment, grocery stores, hospitals, quality of school district)
- The Home’s Unique Features:
- Number of bedrooms.
- The sold price of homes that recently closed.
- Any desirable upgrades and renovations.
- The presence of luxury features like a swimming pool.
- Extra livable square footage due to additions like a finished basement.
- Current market value of comps and similar homes.
- Other sales data from pending home sales.
All these factors will give you the right price for a home valuation.
Location
Is the area in growth or decline? Is the house located in a desirable neighborhood? Is it in a cul-de-sac, corner lot, or off the main road? All these factors determine how desirable a property will be in the local market. If it’s more desirable, then its estimated value goes up.
Condition
A property’s condition has a big impact on a CMA’s results. Ones in good condition have higher values compared to similar properties that have not been maintained. The typical factors that influence the condition include:
- Age of the home
- Recent improvements
- Age of the roof
- Landscaping quality
- Foundation condition
- Flooring condition
- Age of HVAC and other systems
It’s not uncommon to see a price difference between two homes with the same floor plan on the same street due to its condition. This factor is one of the most important ones to consider in terms of risk vs. reward.
For example, it’s wiser for an investor to acquire a home that just needs new flooring and paint vs. extensive foundation repair. Unless they can negotiate a price decrease to make up for significant repairs, properties in bad condition are riskier.
Amenities
Is the property near many convenient amenities, or does one have to drive half an hour to go to the grocery store? Fewer amenities typically bring down home values. On the other hand, being near hospitals, pharmacies, grocery stores, parks, and restaurants brings up a property’s value.
Economic Situation
Is the local economy booming? Are there high-profile employers setting up headquarters in the area? Home values can increase when they are near popular places of employment that raise the local average wages.
Educational
The presence of schools around the area can also affect a home’s average price. For example, if it’s a single-family rental near a college campus, then you can guarantee that it will be in high demand during the academic year. Also, a home positioned near good schools can make it more marketable as well.
How Can a Real Estate Market Analysis Help?
Real estate agents depend on CMAs to help their clients make the wisest choices. It is one of the most accurate ways to assess risk and potential profit. It’s also a great way to visually present a a property’s value. Here are some ways a CMA assists real estate professionals, investors, sellers, and buyers:
Finding the best contract offer price:
Buyers want to put their best offer forward, and knowing the home’s market value helps them make a competitive offer.
Determining fair market rent:
A home’s price, size, and condition all factor in its ultimate rental price. CMAs help investors see how much income a property can generate over time. This can be the difference between making a house a fix and flip or a long-term rental.
Establishing a realistic but competitive listing price:
CMAs allow listing agents to set the fairest market price for a property. This analysis dives deeper into examining the property’s condition, specific neighborhood, and other factors that may be left out of a generic average automated by an internet database. Therefore, good home value estimator can avoid pitfalls such as low appraisals that can jeopardize a standard transaction.
Finding an investment property’s potential value after repairs:
There may be an REO/distressed property in the area that the investor wants to scoop up. Checking the comparable properties in its vicinity allows buyers to see what the property could be worth when it is restored to its best condition. Then, the investor can determine whether the property will be profitable after repairs, or if they should move on to something else.
A Closer Look at CMAs
So, now that we have discussed what a real estate market analysis is, let’s look at a fictitious property and show you how we would get its estimated market value.
Property A is located in a starter home neighborhood. It’s a typical 3-bedroom 2-bathroom rambler and is around 1,100 square feet. It’s located in a cul-de-sac in a quiet neighborhood that’s near some highly rated schools. Though it’s a modest, basic home, it’s desirable to many buyers and renters.
To find its value, a real estate agent goes on the MLS and searches for all the homes that recently sold in the neighborhood. Then, the agent should eliminate any result that isn’t like property A. For instance, all 2-level or split-level homes should be removed. Any house with a garage should be removed. Only nearby 3-bed, 2-bath ramblers with similar square footage should remain.
What if there are no comps in the same neighborhood?
If the agent needs to cast the net wider, such as going outside of the neighborhood, they should stay within a close radius to grab just enough comps. The farther you go, the less accurate the results will be. You can also include active and pending sales if there are no other options.
Let’s say the recently sold home values of the comparable homes are as follows:
- $303,000
- $310,000
- $305,000
- $308,000
When you take these numbers and divide them by 4, the average home value is $306,500.
Now, you must examine the property’s condition and location (since cul-de-sac vs main street matters), then finalize the value proposal. As you can see, a CMA can be slightly subjective, but there are many factors at play to control its value. When done correctly, there are not a lot of chances for a CMA report to be off target.
- Note: If you want to DIY a subject property, you can go into a database like Zillow and look for the recent sales in your neighborhood. This won’t give you the complete picture, but it’s a great start to see what price range your home merit in the current housing market.
Find Property Values with Marketplace Homes
Every property’s value matters when you need to grow a profitable real estate investment business. When you work with the real estate professionals at Marketplace Homes, we’ll examine all comparable sales to determine a home’s top dollar potential. With thorough information, our realtors can give you an accurate CMA. Contact us to request a real estate market analysis today.