When you’re buying or selling an investment property, how can you ensure that this property will generate a high return on investment (profit)? Moreover, how do you assess the value of the property and how much it is worth in the housing market? The answer to both questions is simple: by conducting real estate comparative market analysis (CMA).
What Is Comparative Market Analysis?
Whether you’re a new real estate investor or have been investing in the housing market for a while, you’ve definitely heard about comparative market analysis. A CMA is a process of determining the value of an investment property by comparing it to other similar investment properties that have been sold recently and are in the same location. The sale price of these similar investment properties is determined by “real estate comps”, which is, essentially, what real estate investors use to determine the market value of the investment property.
Why Should You Conduct a Comparative Market Analysis?
A comparative market analysis is a crucial starting point for any property investor, whether selling or buying an investment property. Conducting comparative market analysis will help real estate investors avoid falling into real estate investment pitfalls.
The real estate housing market is ever-changing. The price of an investment property purchased five years ago is not the same today. If your neighbor’s house was sold for $400k, this doesn’t necessarily mean that yours must be worth just as much.
Real estate sellers who don’t know the investment property’s worth in the housing market have trouble selling the property for two reasons: they either price the investment property too high and no buyer will come near it, or they price the property too low and end up missing out on a good return on investment. Thus, a comparative market analysis ensures that they list their investment property at a price that is good enough for the property to be sold and make a profit.
As for real estate buyers, the comparative market analysis provides them with real numbers, and, as a result, they avoid the mistake of overpaying for an investment property. In addition, without a comparative market analysis, buyers miss out on great investment deals. For example, if an investment property is priced lower than the housing market value, buying and flipping it will give a great return on investment. When the buyer doesn’t know this property’s market value, he/she may choose the investment strategy of renting instead of fix-and-flip. In this case, the rental property won’t bring in a quick return on investment, and the buyer will miss out on the possible return that the property could have brought if he/she had conducted comparative market analysis.
Steps to Conducting Comparative Market Analysis
Conducting real estate comparative market analysis is not as hard as beginner real estate investors might think. Here is a brief explanation of the CMA process:
Comparative Market Analysis Step 1: Analyze the Investment Property
The first step is to analyze the investment property by identifying its characteristics. Several characteristics should be taken into consideration when doing a comparative market analysis, and the main one is the size of the investment property (its square footage). Other characteristics include the number of bedrooms and bathrooms, the floors, and the age of the property. In addition, the property investor should also consider some features of the investment property such as swimming pools, gardens, garage or parking, and any other attractions that can affect the value of the investment property.
Comparative Market Analysis Step 2: Find Comparable Properties
The next step in conducting comparative market analysis is to find a number of similar, recently sold investment properties that share the same characteristics as yours in the area you’re targeting. These are called real estate comps. Typically, it is recommended to find 3-5 comparable properties, which were sold within the past 3-6 months, and within a radius of 1-3 miles from your investment property.
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Comparative Market Analysis Step 3: Compare the Properties
A property investor does that by taking the sale price of the comparable properties and divide each price by the property’s square footage to get an average price per square foot. Then, multiply that number by your investment property’s square footage to get its estimated market value.
Is Your Comparative Market Analysis Accurate?
So, now you understand what a CMA is and its process, but how can you ensure that the results are accurate? Here are some tips to guarantee an effective and accurate comparative market analysis:
Get the Help of a Real Estate Agent
You can always conduct real estate comparative market analysis on your own. However, if you want the most accurate results, your CMA has to be completed by a real estate agent (or a licensed appraiser). Agents are professionals who have more knowledge and experience in the housing market, thus analyzing the market and finding the right comparable properties comes easy for them.
Carefully Select Comparable Properties
As previously mentioned, when conducting a CMA, you must find comparable properties that are similar to your investment property, located in the same area (within a radius of 1-3 miles), and have been sold recently (within the past 3-6 months). The best places to find such comparable properties are sold listings, active listings, pending listings, and withdrawn/expired listings.
Adjust the Value
Before you start comparing properties, adjust the estimation of your investment property’s value for the difference from the comparable properties. Moreover, consider financing as it could have influenced the sale price (an investment property which was financed may reflect a higher price than its true value). This ensures that a property investor will arrive at accurate numbers.
Analyze the Current Competitive Market
Analyzing the housing market is definitely required for a full and accurate comparative market analysis. For example, in a market where inventory is high and prices are moving downward, a property investor listing a high selling price will end up with an investment property with low chances of being sold. Real estate investors should always modify their prices depending on the current housing market conditions.
Final Thoughts on Comparative Market Analysis
Conducting comparative market analysis is the best way to making smart real estate investment decisions, especially when it comes to selling and buying investment properties. As a property investor, knowing the value of an investment property is important to find the best properties to invest in. With experience, comparative market analysis becomes a second nature to successful real estate investors.
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