Comparative Market Analysis: What It Is and Why You Need One
Knowing the value of a home is one of the most difficult aspects of real estate deals. As a buyer, you want your offer to be high enough to be accepted, but not so high that you overpay for the house.
As a seller, you want to set a price that will allow you to sell your home without losing money. In both of those cases, finding the proper price is crucial. Fortunately, your Realtor can assist you.
Real estate brokers use a variety of methods to assist you in determining how much to ask for your home, how much to accept or how much to offer. A comparative market analysis is one of those useful instruments (CMA). Let's take a look at what a CMA is, how it's created, and how it can help you buy or sell your Waterloo Region home and get the outcome you're hoping for.
What is the difference between a comparative market analysis and a market analysis?
A comparative market analysis (CMA) is a custom report that assesses the value of a home by comparing it to previously sold, similar homes in the same market. A Realtor can estimate a realistic listing price or advise a competitive offer by looking at what other residences have sold for. Comps are the names for the other dwellings (comparable sales).
The comparisons must have as much in common as possible for a CMA to be accurate. If a home with the same square footage as yours was sold in a different section of town, it may be worth thousands more or thousands less. The same thing happens if a house is sold just down the street, but the square footage is much different.
Main Points of Comparison in a CMA
In order to produce a CMA, at least three to five comparables should be used. To evaluate whether your home or the home you want to make an offer on is a good fit for your CMA, your Realtor will compare these variables to your home or the home you want to make an offer on.
The number of square feet
Renovations/improvements made recently (new HVAC, new roof, etc.)
The number of rooms
The home's age
Special features of the house (fireplace, pool, and so on)
Condition of the house
Because prices vary widely within a city, the comps should ideally come from your specific neighborhood or school district. However, if there haven't been many recent home sales, this isn't always attainable. In that situation, your agent will search for properties in neighborhoods with similar school ratings, crime rates, accessibility to amenities and other community characteristics.
Date of Sale
Only current sales should be included in a comparative market study. Property values, like the real estate market, are always shifting. A home's sale price eight months ago could be much different now. This is especially true in a hot market.
Conditions of Sale
Realtors will also take into account the financing and sale circumstances. Houses purchased with cash may sell for a lower price because the transaction was quick and easy. However, in a CMA, that lower price should not be used because it does not always reflect the home's genuine market value.
Similarly, a buyer may have paid extra since they set a closure date that suited them that was not quite the norm, or had several conditions that were built into the buying contract. That, once again, does not reflect what is really happening in the real estate market.
All of these things will be taken into account by your agent when selecting comps for your CMA. If your Realtor is unable to locate three to five comparable homes, they may use a home that is currently for sale or under contract, or even an expired listing. While it does not provide a sale price, it does provide a rough estimate of the asking price.
How Your CMA Is Prepared by Your Agent
Your agent can put together your comparative market study once they've gathered the best comparables.
At the beginning of the process, your realtor was looking for commonalities between your home and recently sold homes. They'll now be on the lookout for differences. This will help them in obtaining even more precise pricing in the CMA.
Typically, your Realtor will make adjustments to the sale price based on its unique features before calculating the price per square footage.
In a somewhat counterintuitive way, positive features are subtracted from the price of a home, while less desirable features are added to the price. The point of this is to make the comp house the equivalent of yours by only paying for the same features found in your home.
Using Comps to Determine Pricing
Let's have a look at a simple example. In your community, a home that is nearly comparable to yours recently sold for $300,000. Almost every characteristic is same. However, your home is 1,800 square feet, while the competition is 2,000. When you look at the sale price of the comparable home, you can see that it sold for $150 per square foot.
You might use the same calculation to determine that your home's listed price should be $270,000 at that pricing. However, it is preferable to employ many comps in order to eliminate any outliers.
Of course, not every comparison will be this straightforward.
Consider a home that is comparable to yours but includes a pool. A pool will increase the value of a home by roughly 7%. So, if that house sold for $321,000, your realtor would deduct 7% from the sale price, bringing the total to $300,000. If the house had the same square footage as yours (1,800 square feet), the price per square foot was $167.
Let's take a look at a third scenario. Another house is comparable to yours, although it has one bathroom less. A second bathroom often increases the value of a home by 19 percent. The house went for $245,000 when it was sold. Your Realtor would then increase the sale price by 19 percent, bringing it to $291,550. If the house is the same size (1,800 square feet), the price per square foot is $162.
Your Realtor now has three options for determining the listing price: $150, $162, or $167 per square foot. They will probably advise you to put your house on the market for between $270,000 and $300,600.
How to Make the Most of a CMA
Now that you understand what a CMA in real estate is and how to utilize one, your realtor can use it to assist you in determining a reasonable price for your home.
In the example above, if you’re selling the home, you’d probably want to list it closer to the higher end, to allow room for negotiating. It depends on the market, though. A hotter market may warrant a higher price, since you’ll probably receive multiple offers.
If you’re the buyer, you’ll want to offer on the lower end, in anticipation of a counteroffer. However, if the market is a hot seller’s market, there will likely be competing offers. This might mean you’ll lose out on the home if you go too low.
A comparative market analysis from a Realtor can help you feel more confident going into negotiations, whether you're buying or selling. If you don't already have one, now is the time to hire one.
If you are planning on buying or selling a Waterloo Region home Team Pinto would love to help you. Let Team Pinto use their huge local real estate experience and expertise to do so. Contact the award-winning Team Pinto here, or book a free Zoom consultation to discuss your unique Waterloo Region real estate needs here