Pricing is crucial for real estate investors. If you're on the buying side of a transaction, you'll want to do your best to avoid overpaying for the property, and if you're on the selling end, it's important to price the property fairly so you can find a buyer relatively quickly. To that end, a comparative market analysis (CMA) for real estate is an essential tool for every investor to have in their back pocket.
With that in mind, below is a guide to using a CMA as an investor. Read on below to learn what a CMA is, how it works, and how to conduct one of your own. Armed with this knowledge, you should be able to use this type of report to accurately price the properties in your portfolio.
How comparative market analysis (CMA) works
In real estate, a comparative market analysis (CMA) is a tool that real estate agents use in order to help sellers set the list price for their homes and, less commonly, to help buyers or investors make competitive offers. At its core, a comparative market analysis looks at similar properties that have recently sold in the area to determine how the property in question stacks up against the competition.
It can be helpful to think of a CMA as an informal version of an appraisal. in this case, you or your real estate agent will compare various details about the property to those of the recently sold homes in order to give you an approximation of your home's market value. However, it's important to note that this exercise can't replace a formal appraisal, which will need to be conducted after the home is under contract if the buyer is financing the purchase of the property.
As an investor, you're likely most interested in the second use for a CMA. Again, this tool can be used to help you make a fair offer on a property. Put simply, by comparing the property to other recently sold homes, you'll be able to get a better idea of the property's fair market value. Once you have that information in hand, you'll be able to craft an offer that's fair to the seller and still meets your bottom line. Alternatively, you'll also be able to see if the math doesn't make sense and you'd be better off looking for another investment property.
Factors considered in a CMA report for real estate
As mentioned above, there are multiple factors that get compared when you're putting together a CMA. However, in order to give you a better idea of what to expect from a CMA report, we've listed some of them out for you below. Take a moment to look them over to get a better understanding of which specific factors go into the comparison.
- The location of each property.
- The square footage and acreage of each property.
- The number of bedrooms and bathrooms in each property.
- The age of each property.
- Any upgrades, additions, or amenities that might set one property apart from another.
- Any interior finishes that might add or subtract value from each property.
- The condition of each property.
Typically, each CMA report that is generated will compare three to five properties on the basis of those criteria. First, they'll use the recently sold properties to come up with a price range in which the property in question should fit. Then, you or your real estate agent will be able to look at the unique characteristics of the property in question to determine where it falls within that price range.
Benefits of a CMA for real estate
Truthfully, there are many benefits to using a CMA as a real estate investor. To that end, we've listed them out for you below. Look them over to get a sense of why you need to add a comparative market analysis to your investment tool kit.
On the buying end
Put simply, as a buyer, you can use a comparative market analysis to make sure you don't overpay for your next investment property. By educating yourself before you hand in your offer, you'll ensure that you have a good idea of the fair market value of the property. Once you have that information, you'll be able to write up an offer that's fair to both you and the seller and to make more educated negotiation decisions.
On the selling end
When you're ready to sell your investment property, a comparative market analysis can tell you whether now is the right time to use your exit strategy. By comparing the prices of recent sales in your area, you'll be able to estimate how much you'll get if you sell your investment. Then, you can use those numbers to determine if the potential return on investment suits your needs or if you should hold on selling for a while.
How to perform your own CMA for real estate
The next step in this process is to learn how to formulate your own CMA. With that in mind, we've laid out the steps for you below. Follow each of these steps in turn and you'll end up with a close approximation of the home's value.
Step 1: Analyzing your investment property
First, you have to analyze the investment property in question. Start by gathering all the relevant property data, like its age, size, and the number of bedrooms and bathrooms that it has. Then, do your best to make an honest critique of the property’s condition, as well as to make note of any improvements or amenities that you think might add or subtract value.
Step 2: Finding appropriate comparables ('comps')
Next, use that property data to search out relevant comparables. Ideally, you want to look for three to five similar properties that have sold in the area within the last six months. In this case, the closer you can get to the property in question, the better. Do your best to find properties that are in the same neighborhood, that have the same number of bedrooms and bathrooms, and are in the same general condition.
That said, keep in mind that there's a good chance you won't be able to find recent sales that meet all of those criteria. When in doubt, just get as close as you can.
Step 3: Adjusting for value
Lastly, you need to adjust for value. Once you've found three to five properties that can be used as comps, they can give you a realistic price range for your investment property. Then, depending on the property data that you collected in the first step, determine where the property in question fits within that price range.
The bottom line
As an investor, a comparative market analysis can be an invaluable tool to have at your disposal. With that in mind, use this post to guide you through the various benefits of generating these reports and using them to fairly price your investment property or to craft a fair offer.