Whether you're buying or selling a home or residential investment property, a comparative market analysis (CMA) can be extremely helpful in determining the property's value.
Often seen as a more affordable option than a formal independent appraisal or broker's price opinion (BPO), a CMA can be a great low-cost or free tool that helps you determine what a property is worth.
Read on to find out what a comparative market analysis is, how it works, and how to have one done.
What is a comparative market analysis?
A comparative market analysis is conducted by a licensed Realtor and is used to provide a thorough evaluation of a property's worth by selecting nearby properties that are comparable in condition, size, location, and features. These are called "comps." Adjustments can be made to compensate for unique features of a property or incomparable property traits such as an extra half bath, larger lot, or more garage space.
In residential real estate markets, comps are the main way to derive the value of a property. If you want to sell a three-bedroom, two-bathroom ranch home that's been recently updated but aren't sure what it would sell for, a Realtor can look at similar three-bedroom, two-bathroom ranches that have been recently updated in your neighborhood to help determine a likely sales price.
How to do a comparative market analysis
Most CMAs have a minimum of three comparable properties. These properties can be for sale, pending, or sold. Sold prices are the most useful. Just because a home is for sale at a certain listing price doesn't mean it's worth that price. The more comps, the more accurate the valuation.
Several factors are used when conducting a CMA to determine the best comparable properties:
- Age of the property: A house built three years ago won't have the same value as a very similar house built 12 years ago.
- Number of bedrooms and bathrooms: This is an important factor, and relates to the next point.
- Size of the property, including land: Square footage and lot sizes should be as close as possible (ideally within 300 square feet).
- Location: Comps should be within the boundaries of a given neighborhood or, at most, a one-mile radius. If the property's in a rural area, comps can extend beyond one mile but should be in similar locations (you wouldn't compare a property on farmland to one in a small town). This also takes into account if the property is on a busy road; next to commercial property; or near offices, parking lots, railroad tracks, or other features. For example, if your home is next to a railroad track, it wouldn't be comparable to a property on a quiet residential street three blocks away.
- Features: This includes unique features such as a fireplace, pool, garage, carport, or basement. Improvements like a new roof, furnace, air conditioner, water heater, or flooring are taken into account, too.
- Property type: Comps ideally look the same, including the number of stories, the material used to build the property, and the style of the home (Colonial, Craftsman, ranch, Cape Cod, modern, and so on).
Finding a "perfect comp" is uncommon. Rarely will comparable properties have all of the exact features of the subject property. The Realtor's job is to determine which properties are the most comparable considering the above factors. Many times, certain features outweigh others and it's up to the Realtor to decide which properties provide the most accurate representation of value.
How to get a comparative market analysis report
Ordering a CMA is as simple as asking your local Realtor. Most Realtors don't charge a fee for this because it could lead to a potential sale when the client is ready to buy or sell. Some Realtors may charge a modest fee, however.
It takes experience and skill to know which properties to use in a CMA. Some Realtors are better versed in this process than others. Ask your Realtor about their experience conducting CMAs as well as their knowledge of your neighborhood or area. If you feel the property value isn't representative of the neighborhood or the comps don't seem very comparable, ask for a second opinion from their broker. However, a good Realtor can explain their CMA and help you understand how they got that value.
No one wants to overpay for a property or undercut themselves when it comes time to sell. CMAs can be a great resource to help you understand a property value, making you an informed buyer or seller.