Comparative Market Analysis (CMA)

A comparative market analysis is a detailed report based on several data aspects processed and evaluated to determine the fair market price of a target property, land, or home. Anyone with the proper and reliable data can create it. It is done by collecting information on recently sold similar house prices in the same locality, area or neighborhood. The general purpose of a CMA is to provide a general overview and a ballpark figure, which can be considered a reference point by buyers and sellers when negotiating a real estate deal in any given location.

A CMA tests homes of a specific area with the same features and amenities such as size, square footage, number of bedrooms, the year it was built, condition and improvements made. A CMA will also include any special feature that can influence the market price of that house. Typically, it is the part of a real estate agent or broker’s services and is generally informal in representation.

From a buyer’s point of view, it is highly beneficial as having the right information from CMA can save them from falling into the bad pitfalls of inflated prices or becoming victims of real estate scams. It gives them leverage to negotiate better and have a straightforward discussion of the statistics and knowledge of the property and locality. People have their way of deducing the CMA, yet ultimately, they follow the same comparison process.

The steps to perform a comparative market analysis are -

#1 - Gathering data and information

The first step is to collect reliable and all types of real estate data available, required and linked to the targeted property. Such as the year it was built, the square footage area, location details, architect assessment, previous tax bills, number of rooms, and overall condition. This includes sales history, current tax rate, property ownership, improvement permits, and changing property prices. Such information also answers many queries at the beginning of the analysis, such as has the property followed or deviated from industry trends over time, how many times the ownership of the property has changed, anything suspicious about the property and so on.

#2 - Collecting details of similar sold properties

Accumulate data of similar properties sold in the neighborhood or immediate area. The better the sample size, the better results can be obtained; hence, try to get details of as much of the house sale information as possible. Remember, this is also important from comparison and drawing insights. With sample size also pay attention to the similarities between the target property and the other properties. The more similar, the better. In addition, gather in depth analytics on active listings to understand buyer behavior and market trends.

#3 - Collate and compare

In this step, the real estate professional or analyst tries to deduce the CMA will begin with the target property's historical value to reach a ballpark figure of the current market price and overall percentage increase in the industry. Next, the prices of similar properties sold in the local market within the last 12 months. Here, the analyst can set the duration as per their requirement. The current market trends will be evaluated to understand how similar properties performed. Using the comparison, create a general price range for the target property and rank them from lowest to highest.

#4 - Adjustments

This is a crucial step in conducting CMA. The similar properties taken into consideration are called comps, and the analyst makes adjustments based on several factors such as size, number of rooms, location, locality, and overall condition. Making adjustments helps arrive at a better and more accurate result.

#5 - Data consolidation

In this step, the analyst furnishes the calculation and creates a final price range for the said property. This range is taken sincerely by sellers to list home prices and, at the same time, is used as a reference by buyers in negotiating. Since a CMA is based on a series of factors, a lot of it depends on the agent and analyst's expertise and market knowledge.

#6 - Presenting CMA

The final step is to present the CMA; the adjusted price of each comp is divided by its square footage to deduce the sold price per square foot. Take the averages by repeating the method, adding them, and dividing them by the total number of comps. The last step is to multiply the average by the target property's square feet to estimate the price.

Here are two examples of comparative market analysis -

Example #1

Suppose Kevin has been a real estate investor for many years. Recently, he liked a property in New York. The property is currently being sold for $180,000. Kevin decides to conduct a full comparative market analysis before making a final decision. He collects all the data and goes through nine of the recent house sales in the neighborhood, makes adjustments, compares and finally, Kevin creates a CMA for himself.

As per his determination, $135,000 is the general price range for the location and hence decides to challenge the seller's price for a good negotiation. Kevin finally gets a good deal and buys the property at $135,459 from the New York seller. While this is a hypothetical example, but many factors come into consideration in the real world.

Example #2

The second example comes from Cumberland. There are houses under construction by a Washington-based construction company that has bought multiple lots at $1 each as part of their Infill Development Incentive Program. Walter Bowman, a licensed general contractor and CEO of the construction company, met with the mayor and city council to discuss the possible location of a new business in Cumberland.

Although everyone was skeptical, after proper research and conducting a comparative market analysis on the city's housing stock and many discussions, the Cumberland officials decided to give it a green flag. The company signed agreements according to which the city is seeking growth within its municipal boundaries.

The critical differences between comparative market analysis and appraisal are - 

• A CMA is done by anyone from a real estate agent, buyer, seller or any other real estate market participant or enthusiast. In contrast, a state-licensed and certified appraiser can only do an appraisal.
• Sellers use the comparative market analysis value to list prices, and buyers bargain and negotiate the price. In comparison, appraisal value is used by lenders to set an amount the buyer approves.
• CMA establishes a home or property's market price, but appraisal value determines the value of the same property or house.