Carrying out competitive market analysis before investing in a property is essential for both novice and experienced real estate investors.
Table of Contents
- What Is a Competitive Market Analysis?
- Is Competitive Market Analysis Synonymous With Appraisal?
- What Does a Competitive Market Analysis Contain?
- Who Should Conduct a Competitive Market Analysis?
- How to Do a Competitive Market Analysis
- Key Takeaways
Have you been in the market searching for the right investment property and feel like you’ve just found one that matches your search criteria and investment goals? How can you make sure that you’re buying the property at the right price before making an offer?
Figuring out how much to offer when buying an investment property can be a challenging task, especially for beginner investors. Considering the many factors that go into determining a property’s fair value, figuring out its worth can seem quite subjective.
All investors should know about competitive market analysis real estate at some point in their investing journey. What is it and how can you use it when investing?
What Is a Competitive Market Analysis?
Competitive market analysis, or CMA, refers to a method used by real estate professionals to determine the fair market value of a property listing before buying or selling it. The professionals look at similar properties that have recently been sold, as well as current listings, within the same neighborhood.
Conducting a reliable and accurate competitive market analysis can be an uphill task since many real estate professionals aren’t taught this skill in their licensing classes. Many enter the field without this special expertise in market analysis.
It’s also challenging to estimate a property’s fair market value since there are many factors that influence how much a property is worth. The most common factors are the location, the number of bedrooms and bathrooms, and square footage. Other factors include property’s condition, age, lot size, amenities, and so on.
However, you can individually perform a competitive market analysis by looking at real estate comps.
Is Competitive Market Analysis Synonymous With Appraisal?
We’ve seen that a CMA allows you and your real estate agent to know how much other comparative properties within the same neighborhood are selling for. On the other hand, a real estate appraisal refers to a formal, neutral estimate of a property’s value as of a particular date.
As such, many people tend to confuse a CMA and appraisal since they are both used to get a property’s fair market value. However, the main difference between the two lies in the personnel involved.
A CMA can be conducted by an agent or any real estate professional. On the other hand, an appraisal is performed by a licensed property appraiser on behalf of a bank. A bank or lender conducts a property appraisal when an investor requests financing to purchase a property.
While CMA and property appraisal methods are quite similar, bank property appraisers have no vested interest in the said property. The main goal of an appraisal is to determine a property’s fair market value to ensure the bank isn’t lending the investors more money than needed.
Also, a CMA provides a range for the property’s fair market value. An appraisal, on the other hand, provides a specific value for the home. Appraisals are also supported by the presentation and analysis of relevant property data.
While conducting a CMA, a real estate agent or investor heavily relies on how much comparable properties nearby have sold for and how long the homes stayed on the market before selling. CMAs look at properties with similar square footage and the same number of bedrooms. An appraisal heavily depends on the particular property’s features and condition.
Related: How Long Are Appraisals Good For?
What Does a Competitive Market Analysis Contain?
Real estate agents can use software solutions to generate a CMA real estate report. However, it’s also possible for investors to perform their own CMA. A good CMA report contains the specific property and three to five comparable homes. You then get the following data for each home:
- Property Size: The report contains the square footage for every comparable property.
- Property Description: The property description includes the address, number of bedrooms and bathrooms, floor plan, and elevation. It also includes other important property features, like laundry, heating and air conditioning, and flooring.
- Sales Price: The report includes the prices at which the comparable homes each sold for. If there were any price adjustments, the report contains the initial listing price, as well as the price per square foot.
- Estimated Property Value: Finally, the CMA report will give you an estimated fair market value for the specific property you’re analyzing.
While there’s no format for a standard CMA market data approach, a typical one will include the above data relating to market analysis real estate.
Who Should Conduct a Competitive Market Analysis?
Who should obtain a CMA real estate report and how does getting one help them? Here’s a breakdown of real estate professionals who should get a CMA:
- Home Sellers: A CMA report helps home sellers price their properties competitively and get an insight into the profits they should expect from the sale. The report not only helps them set a listing price but also creates an effective marketing strategy.
- Home Buyers: With a CMA report, a home buyer can estimate a property’s fair market value and also submit a competitive offer. Generally, a CMA protects a buyer from offering too much or too low on a home. It also helps buyers stay on their budget.
- Investors: Investors who want to make profits from flipping a home or renting their property know that it’s important to get their numbers right. A CMA report can help you analyze undervalued investment properties and protect you against making poor investments. It puts you in a stronger negotiating position.
- Refinancers: CMA reports also help property owners determine if their home’s value is enough to complete a refinance. Typically, lenders require you to provide at least 20% equity to qualify for refinancing. A CMA will help you know whether you can qualify.
How to Do a Competitive Market Analysis
If you don’t want to go through the trouble of getting CMA reports yourself, you can hire a real estate agent to do the analysis. They are able to access more data points and also understand real estate trends in your home market.
However, you can also carry out the entire process yourself. Simply follow the steps below:
1. Analyze the Neighborhood
“Location is everything” has always been a common saying in real estate for a reason. You should carry out a real estate market analysis even before you look at the property itself. Ideally, the general quality of the neighborhood can help you assess whether you’re getting a good deal.
Firstly, look at the quality of the neighborhood by noting the features that are attractive and those that are not. Determine how close the neighborhood is to amenities such as parks. Secondly, take a mental note of the curb appeal and the most attractive blocks. Check whether there are any potential causes of disturbance, such as railways and busy highways.
While you can do the above using Google Street View, keep in mind that the images might be a bit outdated. It’s better to drive through the neighborhood yourself.
2. Gather Property Details
Once you’re done with the location, it’s now time to focus on the property itself. You want to learn as much as you can about the property before you purchase it. Remember, to compare the subject property to other comparable homes, you need to know everything about it. It’s also easier to find accurate real estate comps when you have the property details.
Here’s the property data you need to have with you:
- Property location, including street, neighborhood, city, and county
- Acreage, if it’s privately owned
- The number of bedrooms and bathrooms
- Square footage
- Recent renovations
- Property age (Year build)
- Any outstanding features, such as a swimming pool
Some professionals also recommend gathering property tax information. It is because the property tax determines property expenses which, in turn, affect the property price. High property tax lowers the property value. It might not be a principal factor, but definitely something worth considering.
Related: Tax Season 2022: Guide for Real Estate Investors
3. Select Comparable Properties
After understanding the local housing market and gathering as much property data as possible, you can now search for real estate comps. What does comps mean?
Real estate comps are comparable properties that are similar to the subject property. Ideally, you want to select three to five properties within the neighborhood that have sold recently.
Pay special attention to this step. It might be the most important step of the comparative market analysis process. You want to compare apples with apples, not other fruits. A single mistake can lead to an overestimation or, even worse, undervaluing the property.
Focus on homes that are within a one-mile radius of the subject property and within the same school district. The comps should have the same square footage, number of bedrooms and bathrooms, lot size, and construction type as the subject property.
Also, only select comps that have been sold recently. The more recent the better since property prices fluctuate over time.
4. Adjust Value for Differences
No matter how similar the comparable properties might be, there might be small differences. As such, you need to make some adjustments to the property values to make up for the differences.
For example, let’s assume the subject property is a two-bedroom home. You find a comparable property that’s similar to it in every way and has recently been sold, only that it’s a three-bedroom house. In this case, you can assume that the buyer paid more for the extra bedroom. Assign a value to it and deduct it from the comp value.
Add or subtract values to any differences in the acre and lot size, as well as bedrooms, bathrooms, and garages. You don’t need to adjust the value of the subject property.
Related: How Much Does It Cost to Sell a House?
5. Calculate the Price per Square Foot
At this point, most of the heavy lifting has already been done. If you nail the previous steps, the rest should be easy.
The next step involves calculating the average price per square foot for the subject property, as well as the property comps. Simply divide each of the selling prices by the specific square footage of the property. Now, multiply this figure by the subject property’s square footage to find the average price per square foot.
Let’s look at a case study to understand this concept better.
Assume you want to carry out a comparative analysis for a property with a square footage of 2,000 feet. You have conducted a search for property comps and selected the following comparables:
- Property 1: 2,100 square feet sold for $350,000 (Price per square foot = $166)
- Property 2: 2,000 square feet sold for $340,000 (Price per square foot = $170)
- Property 3: 2,200 square feet sold for $360,000 (Price per square foot = $163)
- Property 4: 2,050 square feet sold for $345,000 (Price per square foot = $168)
Based on these figures, the average price per square foot is $166. Now multiply this figure by 2,000 (the subject property’s square footage) and you have $332,000. It is a fairly accurate estimate of your subject property’s market value.
6. Assess the Property in Person
Now that you have an estimate of the property’s fair market value, don’t stop there. You need to visit the property in person and assess it yourself. This is to ascertain whether there are any major property issues that can affect the property’s buying price.
Ask the property owner about any recent repairs or major upgrades. If there are any, estimate how much value they’ve added to the property.
If you find any major issues that you didn’t account for in your property research, such as cracks in the foundation, old siding, or other hidden issues, you might need to adjust your CMA to get a more accurate estimate.
Conducting a competitive market analysis is a crucial way for investors to estimate the fair market value of a property. A CMA report will help you make a competitive offer and also negotiate the buying price.
When carrying out the CMA process, you need to be careful so that you don’t end up with an inaccurate estimation. For example, your comps should be as similar to the subject property as possible. In addition, they need to have been sold recently because real estate prices change.
This is why you need a real estate investment platform to get an accurate CMA report. Mashvisor is the best resource for real estate data, property comps, neighborhood and property analyses, and real estate calculations.
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