When you’re starting a real estate investing career, one term that you will definitely come across is real estate comparative market analysis (CMA). The world of real estate investing is vast and as a real estate investor, you’ll come to realize that there are so many options to choose from and decisions to make. For example, a few things that property investors need to determine are the type of investment property to buy, the rental strategy to follow (traditional or Airbnb), how much to charge for rent, etc. This might overwhelm a beginner real estate investor. However, those who perform comparative market analysis will find the right answers!
So, what is a comparative market analysis? Why does it have an important role in real estate investing? How does a real estate investor conduct one and ensure accurate results? Keep reading to find out everything property investors need to know about comparative market analysis.
Comparative Market Analysis – The Definition
In the simplest words, a comparative market analysis is a process of determining the value of the investment property by comparing it to other similar, recently sold investment properties in the same location or housing market.
These similar investment properties are called “real estate comps.” Real estate comps is yet another popular term in real estate investing, and it is essentially what real estate investors use to determine the market value of an income property of choice before they decide to sell or buy. The key to performing comparative market analysis is to find the most identical properties (real estate comps) in terms of size, shape, and condition including square footage, age, location, and amenities.
Related: How to Easily Find Real Estate Comps
Comparative Market Analysis – Its Benefits
Performing comparative market analysis is a crucial starting point for any real estate investor, whether he/she is looking to sell or buy an income property. Performing comparative market analysis will help real estate investors avoid falling into real estate investment pitfalls and guarantee a successful real estate investing career.
The real estate housing market is always changing. The price of the investment property purchased years ago will not be the same today. If your neighbor sold his property for $400k, this doesn’t necessarily mean that yours must be worth the same – it could be much more or much less. The only way of finding out how much an income property is worth is through a comparative market analysis.
Benefits of Comparative Market Analysis for Real Estate Sellers:
Why is it important for real estate sellers to perform comparative market analysis? Sellers need to know the investment property’s worth in the housing market simply because not knowing will lead to either one of two situations: property investors will price an income property too high which may lead to not finding a buyer, or they will price the investment property too low which will lead to missing out on a good return on investment which they could have had. Thus, a comparative market analysis is beneficial to ensure that property investors list their investment properties at the right market price to guarantee selling the property and making a profit.
Benefits of Comparative Market Analysis for Real Estate Buyers:
As for buyers in the housing market, they need to perform comparative market analysis and find the value of an income property in order to avoid making the mistake of overpaying for the investment property. In addition, when searching for an income property without the help of a comparative market analysis, buyers might miss out on other great investment deals. For example, when the buyer knows that an income property is below market value, he/she will realize that buying and flipping it will give a good and instant return on investment.
On the other hand, when the buyer doesn’t know this information about the investment property’s market value, he/she may choose to rent out this property instead of going with a fix-and-flip. In this case, the rental property won’t bring in a quick return on investment, and the real estate buyer will miss out on the possible return that the investment property could have generated if only he/she had performed a comparative market analysis.
Comparative Market Analysis – Steps to Perform It
Conducting real estate comparative market analysis is not as hard as beginner property investors might think. Here is a brief explanation of the comparative market analysis process:
Performing a Comparative Market Analysis Step 1: Analyze the Investment Property
The first step is to analyze the investment property by identifying its characteristics. Several features of the income property should be taken into consideration when you perform comparative market analysis, and the main one is its size (square footage). Other characteristics include the number of bedrooms and bathrooms, the floors, and the age of the property.
In addition, there are some features that can affect the value of the investment property which the real estate investor should also take into consideration when analyzing an income property such as swimming pools, gardens, garage or parking, and any other attractions.
Performing a Comparative Market Analysis Step 2: Find Comparable Properties
The next step in performing 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. These are, as mentioned, real estate comps. Typically, you should 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 should be able to find real estate comps in current running listings, pending listings, sold listings, and expired listings. To find real estate comps for comparative market analysis, check:
- Mashvisor for all the current running listings across the country.
- The Federal Housing Finance Agency for recently sold listings.
- The FNC Residential Price Index for market data and trends for cities across the country.
Click here to start searching for the best investment properties in any state, city, and neighborhood across the US housing market!
Performing a Comparative Market Analysis Step 3: Compare the Properties
After collecting all the necessary data and real estate comps, it is time for you to do the calculations for the comparative market analysis. The main method for calculating property values is the price per square foot. To estimate the price per square foot, property investors simply take the selling price of the investment property and divide it by the home’s square footage. Repeat this step for real estate comps on your list.
Then, you need to take the sum of each property’s price per square foot and divide it by the number of properties in order to calculate the average price per square foot for the comparable properties. To make things clearer, here’s an example: Suppose a real estate investor wants to perform comparative market analysis and has 3 comparable properties:
- The first property is 2,500 square feet and is sold for $400,000 (price per square foot is $160)
- The second property is 2,700 square feet and is sold for $425,000 (price per square foot is $157)
- The third property is 2,300 square feet and is sold for $385,000 (price per square foot is $167)
In this example, the average price per square foot is $161. As a result, the real estate investor can conclude that investment properties with a price per square foot above $161 are above the market average and vice versa.
Lastly, to estimate the market value of the target investment property, the real estate investor will multiply the square footage of the property by the calculated average price per square foot. So, in our example, if the target property is 2,500 square feet, then its approximate value is $402,500.
Comparative Market Analysis – Tips for Accurate Results
So, now you understand what a CMA is and how to perform one, but how can you ensure that you’re getting accurate results? Here are some tips to guarantee an effective and accurate comparative market analysis:
- Hire a Real Estate Agent
Property investors can always perform comparative market analysis on their own. However, to get accurate results, your CMA has to be completed by a real estate agent. Agents are professionals who have more knowledge and experience in the housing market, thus analyzing the market and finding the right real estate comps comes easy for them.
- Carefully Select Real Estate Comps
As previously mentioned, to perform comparative market analysis, you must find investment properties that are similar to your target investment property, located in the same area, and have been sold recently. Make sure that real estate comps on your list fit these qualifications. Otherwise, you’ll get incorrect results and make the wrong investment decision.
- Adjust the Value
Before you start comparing investment properties, adjust the estimation of your investment property’s value for the difference from real estate comps. Furthermore, consider financing as it could influence the selling price. And don’t forget to modify prices depending on the current housing market conditions.
Comparative Market Analysis – The Bottom Line
As a real estate investor, knowing the value of the investment property is important to find the best properties to invest in and make smart investment decisions. This is why performing comparative market analysis is key to a successful real estate investing career. For beginner property investors, this might seem like an overwhelming process, but with experience, performing comparative market analysis will become second nature.
Mashvisor provides property investors with the best real estate investing tools that make performing comparative market analysis an easy process. Click here to start analyzing investment properties in any state, city, and neighborhood throughout the US housing market!
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