As a prospective home seller (or home buyer), you’ve probably heard of comparative market analysis. This tool has long been used by real estate agents, real estate investors and homeowners to gauge the value of their properties. This article will show you how to carry out a competitive market analysis of your home.
What is Comparative Market Analysis?
A comparative market analysis, simply called ‘CMA’ in industry parlance is an analysis of active and recently sold homes similar to yours within a region. This is a very subjective analysis that can range from a couple of pages to a 50-page guide detailing each and every aspect of a home. Keep in mind that a CMA is not an appraisal. The value assigned to a home in a CMA is purely subjective and based on what a real estate agent or developer believes he can sell a home for. It doesn’t have any legal or financial value.
CMAs have long been used by agents and developers as a marketing tool to win listings. The objective of a comparative market analysis remains the same: to compare your home to recently sold and active listings in the surrounding area and give you a better idea of your home value.
How to Conduct a Comparative Market Analysis
As mentioned before, a Comparative Market Analysis is a very subjective exercise. You (or your real estate agent) may look at ten or ten dozen sales. Your analysis may be limited to homes with the same block, or may expand to a couple of miles. The CMA might be entirely objective with a focus on square footage, number of bedrooms/bathrooms, key amenities, etc, or it may include subjective features as well, such as design, construction, and style into account. Which is to say: there are no hard and fast rules to conducting a CMA.
Having said that, any effective CMA should analyze the following things:
- Home Analysis
The first step in conducting a Comparative Market Analysis is to analyze your home. Ideally, this should include both objective and subjective elements, such as:
- Square footage
- Number of bedrooms and bathrooms
- Land area
- Number of floors
- Construction age
- A comprehensive list of amenities and features
- Location, including proximity to major roads, marketplaces, schools, etc.
- Subjective features such as views, design, style, etc.
- Recent improvements, if any.
- Listing Analysis
A CMA will always consider recently sold homes. It may also consider active, pending and withdrawn listings for an even better idea of prospective value.
1. Recently sold homes: Homes within the same region and with similar size, construction, amenities and location will often sell within the same price range. A long, hard look at recently sold listings will often tell you everything you need to know about your home’s prospective value. In fact, professional appraisers also use these listings to assign a value to a home.
Most agents consider sold listings from the past six months. Depending on the circumstances, they may expand their analysis to a year if there are very few comparable sales, or reduce it to the last few weeks in busy real estate markets.
2. Active listings: This includes homes currently on the market. Understand that a home still waiting for a buyer represents prospective, not real value. Some sellers have high expectations and list their homes for far higher than their actual value. Others may reduce prices in hope for a quick sale.
Market conditions also affect values of unsold homes. A sellers’ market tends to inflate values, while a buyer’s market tends to deflate values. Therefore, always consider active listings as an adjunct to recently sold home values.
3. Pending listings: This includes recently finalized deals that haven’t fully closed yet. You most likely won’t have access to actual selling price of these listings, but it does give you a general idea of the state of the market at the moment, at least in terms of the number of days a property spends on the market.
4. Expired listings: These are listings that expired because they couldn’t find any buyers. Listings mostly expire when prices are too high. If homes similar to yours find their way into the expired listings, it might be an indication that you may have to price your home a bit more aggressively.
- Comparing Your Home Against Recently Sold Listings
Once you’ve gathered enough data on your home and recently sold, active and expired listings, you can start performing a comparative market analysis. Depending on how deep you want to go, this exercise might take you anywhere from few hours to a weekend.
There are a few things you must look out for when comparing homes:
- Square Footage: Square footage and home values don’t necessarily follow a linear relationship. After a certain size, larger homes are actually worth less per square foot than smaller homes. When comparing homes, you ideally want to look at houses that fall within +- 200-400 square feet of your home size.
- Amenities: Amenities such as a swimming pool, play field, parking space or large garage can go a long way in increasing home value. Make sure to consider these when comparing homes.
- Location: Location, as any agent would tell you, is one of the biggest factors in determining a home’s value. However, since you will likely consider sales within the same region, this shouldn’t be a big concern. What you do need to look at are whether your comparables face a quiet street or a busy intersection, whether the bedrooms face a stunning view or a back alley, and whether schools, marketplaces and public transport are nearby.
- Construction Age: Construction age plays a big role in determining the price of a home.
- Upgrades and Renovations, if Any: Make sure to consider upgrades and renovations while conducting a CMA. A kitchen or bathroom remodel can often add thousands of naira to your home value.
- Subjective Features: Buying a home is an emotional decision; something as simple as a tree in the backyard or a quirky window can make a home appear more charming and desirable. Subjective features such as design, style, landscaping and even color can affect home prices. Even if your comparables don’t have the same subjective features as your home, it is important to include them in your analysis.
Conducting a comparative market analysis by yourself is a daunting task. Depending on your circumstances, you may choose to go with your own analysis or hire a real estate agent to do the same. In either case, a self-conducted CMA will give you considerable insight into the valuation process and may reflect a price more rooted in reality.