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A Comprehensive Guide to Comparative Market Analysis (CMA) in Real Estate

CEO Khai Intela
Are you looking to buy or sell a property and want to know its fair market value? Then you need to familiarize yourself with Comparative Market Analysis (CMA). A CMA is a powerful tool used...

Are you looking to buy or sell a property and want to know its fair market value? Then you need to familiarize yourself with Comparative Market Analysis (CMA). A CMA is a powerful tool used by real estate agents to determine the value of a property by comparing it to similar properties in the same geographic area. In this article, we will guide you through the five essential steps of conducting a CMA and explain why it is crucial in the real estate market.

What is a Comparative Market Analysis (CMA) in Real Estate?

A CMA is an analytical tool that real estate agents use to determine the fair market value of a property. It takes into account various factors such as the number of bedrooms, bathrooms, square footage, and the condition of the property, as well as the overall market conditions. By comparing the property to similar homes that have recently sold in the area, a CMA provides a reasonably accurate estimate of the property's value.

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Understanding CMA in Real Estate

To perform a CMA, you first need to find comparable homes that are similar in size, amenities, and location to the property you are evaluating. The closer these properties are to your target property, the more accurate the CMA will be. It is also essential to consider homes that have been sold within the last three to six months for a proper analysis. In some cases, if the market is slow or you are in a rural area, a formal appraisal may be necessary.

It is important to note that a CMA is not an official appraisal performed by licensed appraisers. It is a ballpark analysis conducted by real estate agents. However, some states have laws in place to protect consumers if an agent creates a CMA in an incompetent manner.

Real Estate CMA Vs. Appraisal

While a CMA and an appraisal both use similar methods to determine a property's value, there are some fundamental differences. Appraisals are conducted by professional, licensed home appraisers, whereas CMAs are performed by real estate agents. A CMA provides a ballpark figure and is used to get an estimate of a home's value, while an appraisal is typically required when applying for financing and determines the amount a bank is willing to offer.

Market Conditions & CMA in Real Estate

Market conditions can significantly impact a property's value, even though they may not be apparent during a CMA. For example, a neighborhood undergoing gentrification or rapid deterioration may affect sale prices from three to six months ago. Therefore, it is crucial not to rely solely on comparative market analyses as gospel. A formal appraisal is necessary to solidify the property's value.

What goes into a Comparative Market Analysis Report?

Preparing a CMA may seem complex, but it can be broken down into smaller components. Here are some factors that real estate agents consider when creating a CMA:

  • Location: The most important factor in determining a property's value. If there aren't enough comparable properties in the area, agents may look at nearby neighborhoods with similar school districts, crime rates, and other relevant factors.
  • Square Footage: The size of the house plays a significant role in determining its value. Generally, a larger house will have a higher value.
  • Number of Bedrooms and Bathrooms: Houses with more bedrooms and bathrooms typically command higher prices.
  • Acreage: The size of the lot can impact a property's value. Houses on larger lots tend to be worth more.
  • Age and Condition: The age and condition of the property are crucial factors. Older, run-down homes may require more repairs and maintenance, reducing their value. However, some older homes with historic significance or unique architecture may have higher values.
  • Special Amenities: Features like decks, swimming pools, finished basements, and fireplaces can also affect a property's value. However, not all amenities have a significant impact on the value.
  • Date of Sale: Property values change over time, so comparing properties sold in a similar timeframe ensures a more accurate analysis.
  • Terms of Sale: Sale terms can impact the seller. For example, if the buyer requests the seller to cover some closing costs, the overall price may be higher. Such terms should be considered while performing a CMA.

What is a CMA in Real Estate Image Source: saigonintela.vn

How to Do a Comparative Market Analysis in 5 Steps

Conducting a CMA involves five distinct steps to estimate a property's fair market value:

1. Do a Neighborhood Evaluation

Determine the overall quality of the neighborhood by considering factors such as the school district, noise levels, proximity to amenities like grocery stores, HOA regulations, and any nuisances in the area. Evaluating the neighborhood helps establish the "location" factor.

2. Review Property Details

Take note of the property's square footage, acreage, and the number of bedrooms and bathrooms. Assess the property's condition and identify any noticeable issues or desirable amenities that may impact its value.

3. Find Comparables

Identify three to five comparable homes that have sold within the past few months. Select properties that are geographically close to the target property, and note any differences between the comps and the property under analysis.

4. Adjust for Differences

Make adjustments to the comps based on the discrepancies identified in the previous step. If a comp has superior features, subtract an appropriate amount from its value. Conversely, add money to the comp's value for any negative features. These adjustments ensure a more accurate comparison.

5. Determine the Sold Price Per Square Foot

Divide each comp's adjusted value by its square footage to obtain the price per square foot. Calculate the average price per square foot for all the comps and multiply it by the square footage of the target property. The result is an estimated fair market value.

Comparative Market Analysis Example

To illustrate how CMAs work in practice, let's consider an example. The Jones family is interested in purchasing a three-bedroom home listed at $400,000. To determine a reasonable offer, they ask their real estate agent to perform a CMA. The agent collects information about the property, such as the number of bedrooms, bathrooms, square footage, amenities, and condition. After finding three comparable homes sold within the last six months, the agent makes adjustments for any differences in features. By dividing the adjusted value of each comp by its square footage, the agent calculates the cost per square foot. Multiplying that number by the target property's square footage provides an estimated fair market value. In this case, the CMA suggests an offer of $375,000 for the Jones family.

Benefits of a CMA for Real Estate

The CMA process offers several benefits for buyers and sellers in the real estate market. As a buyer, a CMA helps you ensure you are not overpaying for a house and provides a reasonable estimate of its value. For sellers, a CMA helps determine the right listing price and whether it's a good time to sell or wait for changes in the market.

Summary

A comparative market analysis is a valuable tool used by real estate agents to determine the fair market value of a property. By comparing the property to similar homes that have recently sold, a CMA provides an estimate that helps buyers and sellers make informed decisions. Whether you are buying or selling, understanding the CMA process is vital in navigating the real estate market.

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