When you’re in the market for a new home or looking to sell your current one, figuring out how much to offer or ask can be a considerable challenge. How much a house is worth can seem fairly subjective, considering how many factors go into determining it. However, pricing property is a science. That’s why real estate agents conduct a comparative market analysis (CMA).
A comparative market analysis is a tool that real estate agents use to estimate the value of a specific property by evaluating similar ones that have recently sold in the same area. It can be extremely challenging to reliably estimate the fair market value of a home because there are a significant number of factors that go into determining how much a specific property is worth.
When people who are buying or selling theirs think of factors that impact the price, they typically consider location, square footage and the number of bedrooms and bathrooms. But the property’s age, condition, features, lot size and so on, as well as the conditions of the local and national markets, affect the value of residential real estate as well.
In order to conduct the analysis, agents search for recently sold homes in the same area that are as similar to the subject property as possible.
These homes, which are known as comps, or comparable sales, are used to conduct a sales comparison approach to pricing. This approach relies on the premise that you can figure out how much a home is worth by identifying how much it would cost to purchase a similar home of equal desirability.
The first step for an agent preparing a CMA is to find three homes that have sold recently (within the past 6 months at most, but preferably 3 months). These three homes should be as similar and located as closely together as possible.
Once at least three comps are selected, each one is thoroughly examined to pinpoint how it differs from the home in question. After the differences are itemized and priced out, the sales price of each comp is adjusted to determine how much it would cost if it were nearly identical to the subject property and sold in the current market.
Although a comparative market analysis uses similar housing market indicators to compare and identify regional home values, it’s not considered an official home appraisal. Whereas home appraisals are conducted by appraisers to create home valuations, CMAs are completed by licensed real estate professionals to estimate the fair market value.
Even though the resulting value is an approximation that also incorporates the goals of the seller or buyer of the property, a CMA is a complex process that requires technical knowledge of the overall market and how various aspects of real estate impact how much a property is worth.
Market conditions are a wild card with comparative market analysis and price setting in general. That’s why it’s best to use homes that have sold as close in time to the home currently being priced. A strong buyer's or seller's market might upend CMA values.
For example, a rapidly gentrifying neighborhood might not have strong comparables because housing prices can change dramatically within just a few months. If you’re looking for a home in a rapidly appreciating neighborhood, just remember that even though buyers and sellers may come to an agreement on price, in order to get financing, an appraisal will be needed to determine if that price is justified.
Although completing a comparative market analysis is a complex process, it’s broken down into separate, manageable parts. These parts collectively give sellers and buyers a thorough value estimate.
Analysis begins with agents compiling a list of at least three similar properties within the same area that have sold in the last 3 – 6 months. If there isn’t enough sales data or if the potential purchasing price of a home is being calculated, agents may also select properties that are currently listed on the market or pending. Even expired listings can be used to demonstrate the kinds of prices that are too high to attract interested buyers.
Here’s a list of the various components that go into a CMA:
A comparative market analysis is a crucial tool for estimating the value of real estate. If you’re a homeowner who is interested in listing your property for sale, a CMA will help you determine an appropriate asking price based on what sales prices similar homes in your area have received on the market. A CMA can also assist you in negotiating asking prices and coming up with competitive offers if you’re ready to purchase a new home.
But remember, preparing a comparative market analysis is a convoluted process that requires access to complete sales data and knowledge of local and national markets, which is why it should be completed by a licensed real estate agent.
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