When starting a real estate investing career, one term that you will definitely come across is real estate comparative market analysis (CMA). In simple words, a comparative market analysis is a process of determining the value of the investment property by comparing it to other similar investment properties which were recently sold in the same location or housing market.
Comparative Market Analysis – Benefits
Performing a comparative market analysis is a crucial starting point for any real estate investor, whether he/she is selling or buying an income property. The housing market is always changing; the value of an investment property purchased years ago is not the same today. If your neighbor sold his house for $400k, this doesn’t mean that yours must worth the same. The only way of finding out how much an income property is worth is through a comparative market analysis.
Sellers need to know the value of an investment property to ensure they don’t fall into one of these pitfalls: pricing an income property too high and not finding a buyer, or pricing the investment property too low and missing out on a good return on investment. As for buyers, they need to know the value of an investment property to avoid overpaying for it and missing out on other great investments.
Related: Buying and Selling An Investment Property: Do’s and Don’ts
Comparative Market Analysis – How to Perform It
Step 1: Analyze the Investment Property
Several features of the income property should be taken into consideration when you perform comparative market analysis, and the main one is its square footage. Other characteristics include the number of bedrooms and bathrooms, the floors, and the age of the target investment property.
Step 2: Find Comparable Properties
The next step in performing the comparative market analysis is to find a number of similar, recently sold investment properties that share the same characteristics as your target property in the same area. Find 3-5 comparable properties, which were sold within the past 3-6 months and are within a radius of 1-3 miles from your investment property. Property investors find real estate comps in current running listings, pending listings, sold listings, and expired listings.
Related: How to Easily Find Real Estate Comps
Step 3: Compare the Properties
The main method for calculating property values is the price per square foot. To estimate this, property investors take the selling price of the investment property and divide it by its square footage. Repeat this step for real estate comps and then take the sum of each property’s price per square foot and divide it by the number of properties to estimate the average price per square foot for the comparable properties. The last step to performing a comparative market analysis is to multiply the square footage of the target investment property by the calculated average price per square foot to estimate its market value.
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