If you’re looking for a guide on how to do a competitive market analysis in real estate, look no further. This guide will help you through.
Table of Contents
- What Is a Competitive Market Analysis in Real Estate?
- Why Should You Do a Competitive Market Analysis in Real Estate?
- What’s in a CMA?
- 4 Easy Steps to Doing Your Own Competitive Market Analysis in Real Estate
If you’ve ever been in the market for an investment property, you probably know a few things about identifying the property’s fair market value. If a property’s price is too high, chances are that the seller will struggle to sell it. On the other hand, if it’s being sold for a very low price, the seller will miss out on potential profits.
Before buying or selling, it’s important for an investor to carry out a competitive market analysis to establish whether the property is fairly priced. It helps you compare the values of other comparable properties within the same neighborhood to get an accurate market value for your property. To walk you through the entire process, Mashvisor is here to help you.
Today, we’re going to define what a competitive market analysis is and then show you how to conduct one yourself.
What Is a Competitive Market Analysis in Real Estate?
Knowing how to do a competitive market analysis (CMA) is an important skill in your real estate investment journey.
A competitive market analysis is also known as a comparative market analysis. It refers to a method used by real estate agents and investors to determine the fair market value of a property before buying or selling it. A CMA factors in the prices of other similar properties in the neighborhood that recently sold or are currently on sale.
A competitive market analysis is a crucial tool since many realtors don’t know how to accurately estimate a property’s fair market value. Additionally, there are many factors to account for when estimating how much a property is worth.
Key Considerations
When most people are investing in a certain property, they mostly consider the location, square footage, and number of bedrooms and bathrooms. What they forget is that the property’s condition, age, lot size, features, and many other factors also affect a property’s value. You also need to account for the conditions of the local and national real estate markets.
One thing to note is that a competitive market analysis isn’t the same as an appraisal. A professional appraiser conducts a home appraisal on behalf of a bank or lender. The bank requests an appraisal to determine the real value of a property when an investor applies for a loan to purchase the said property. It’s a strategy by lenders to avoid lending more money than needed.,
Competitive market analyses and appraisals also differ when it comes to methodology. When conducting a competitive market analysis, realtors rely heavily on comparable properties that have sold recently and how long they stayed on the market. On the other hand, appraisals mainly focus on the property’s condition and features.
A CMA provides a certain market value range, while an appraisal puts a specific value on the home.
Related: Appraisal Value vs. Market Value: What is the Difference?
Why Should You Do a Competitive Market Analysis in Real Estate?
Learning how to do a competitive market analysis is arguably one of the best things you can do in your investment journey. Knowing how much other comparable properties recently sold for gives you an advantage to price competitively.
The primary purpose of a competitive market analysis is to help real estate agents, buyers, and sellers determine a property’s fair market value. If you’re a seller, you’ll need to conduct a CMA before listing your property. It will help you set the right price and sell the home fast.
Real estate agents will run comprehensive CMAs for their clients and explain to them how it works. It enables them to help their clients make as much profit as they can from the home sale while keeping the deal as fair as possible. Understanding how long other similar properties stay on the market also helps agents make good business decisions for their clients.
As a home buyer, you’ll need to conduct a competitive market analysis to avoid overpaying for the property. A CMA also lets you know everything you need to know before making a crucial decision. You’ll understand the property’s listing price, fair market value, features, and key selling points.
Since a competitive market analysis involves looking at the whole market, it can help you discover other great deals in the neighborhood. For example, a buyer may realize that the home is selling at a price below the market value; therefore, they can make a great fix and flip deal with a handsome return on investment.
Besides, you can discover which areas within the neighborhood are gaining in popularity and which ones are on the decline. You can avoid the common pitfalls other investors make by conducting an in-depth CMA.
What’s in a CMA?
As we shall see later in the how to do a competitive market analysis section, a good CMA includes at least three real estate comps. Each of the comps plus the subject property needs to contain a list of the following features:
- Property Description – The property description includes details about the property address, number of bedrooms and bathrooms, and floor plan. You can also include other important details, such as air conditioning, laundry, and flooring.
- Property Size – You must include the square footage of each property.
- Sales Price – It is the price that every comparable property sold for. Also, include the sold price per square foot and any price adjustments.
- Estimated Property Value – Finally, your competitive market analysis report must contain an estimation of the subject property’s fair market value.
Note there’s no specific format for a quality CMA report. However, the above list of items to include in your report can be a good starting point.
Related: Rental Comps: What Are They and Where Can I Find Them?
4 Easy Steps to Doing Your Own Competitive Market Analysis in Real Estate
Most investors will hire a real estate agent to carry out the competitive market analysis for them. While some of them better understand real estate market trends and can access more data points, you can also carry out the analysis yourself. Knowing how to do a competitive market analysis will come in handy.
Here’s a step-by-step process on how to do a competitive market analysis:
1. Carry Out Property Analysis
The first step is to conduct a property analysis, which involves gathering all the details you can about the subject property. The subject property refers to the property whose fair market value you’re looking for.
You need to collect as many details about the subject property as possible since competitive market analysis is based on comparisons. After obtaining all the details, you can then understand what type of properties to compare.
Property Features
Here are some of the characteristics you should be looking for:
- Location and Neighborhood – You should drive through the neighborhood to analyze its quality. If the property is in another location, you can use online resources such as Google Street View to see where the subject property is located. Keep in mind that some online photos can be outdated.
- Total Square Footage
- Lot Size
- Number of Bedrooms and Bathrooms – You need to know the total number of bedrooms and bathrooms in the subject property, as well as their sizes and quality. Ideally, the comparable properties should also come with the same number of bedrooms and bathrooms.
- Other Rooms – Check whether the subject property includes other rooms that can be used as an office, storage space, or extra bedroom. It is one of the factors that can significantly affect the fair market value.
- Year of Construction – The property’s age is just as important. Newer properties tend to be more expensive than older ones.
- Features and Amenities – Is the property located in a gated community? Does it come with a swimming pool, fireplace, garden, balcony, or any other features? Is it accessible to amenities, such as public transport, shopping malls, or recreational facilities?
- Property Renovations
The essence of collecting as much data as you can about the subject property is to compare apples with apples. The data collection step becomes important when you start gathering real estate comps to compare with the subject property.
2. Gather Real Estate Comps
The next important step is carrying out a real estate comps analysis to gather comparable properties. For starters, real estate comps are comparable properties that are as similar to the subject property as possible.
How do you identify a comparable property? A real estate comp comes with the following features:
- Close to the subject property on the map
- Recently sold (at least 12 months or six months for hot markets)
- Closed within a realistic number of days on sale and market terms
You would want to pay special attention here. Dissimilar comps will lead to an inaccurate fair market value estimation.
Real estate comps refer to comparable properties that are as similar to the subject property as possible.
Gathering comps is more straightforward in some neighborhoods than others. In a growing development, more houses tend to share the same features and amenities. The houses can make great comparisons. In other areas, especially competitive markets, it may be harder since most houses come with unique features and are of different sizes.
If it’s hard to find recently sold comps, you can work with properties that are currently on the market. Active listings will give you an insight into how the subject property will probably react to changing market conditions. The best active listings to use are those that are already under contract but the sale is not yet completed.
What happens if you can’t find completely similar properties?
3. Consider Adjustments
In most cases, your real estate comps will come with slight differences from the subject property. It is why you need to make some adjustments to the property values to account for the differences.
The best way to adjust the value for differences is by considering a dollar value for every difference. For example, every extra bedroom adds a certain amount to the property value. If your subject property is a two-bedroomed house and you find a three-bedroomed comp, you can assign a figure to that extra bedroom and deduct it from the property’s value.
Remember that the values vary depending on your neighborhood. Assign them to differences based on your housing market and add or subtract to adjust accordingly. You can do it for bedrooms, bathrooms, square footage, lot size, and any other property feature.
4. Calculate the Price per Square Foot
If you followed the previous steps, the rest is going to be easy.
Next, you’ll need to calculate the price per square foot for all real estate comps, as well as the subject property. It’s a simple step that involves dividing each property’s market value by its square footage. Find the average price per square footage. Then, multiply it by the property’s square footage to find its market value estimate.
Let’s assume you find three comparable properties:
- First property: 3,000 square feet sold at $540,000 (Price per square foot = $180)
- Second property: 2,700 square feet sold at $500,000 (Price per square foot = $185)
- Third property: 2,600 square feet sold at $480,000 (Price per square foot = $184)
From the given figures, the average square footage is $183.
If the subject property comprises 2,800 square feet, its fair market value is $512,000. You can use the estimate to price the property fairly.
Related: The Best Real Estate Competitive Market Analysis Software for 2023
Key Takeaways
Knowing how to do a competitive market analysis helps investors and real estate agents determine the fair market value of a property. The analysis involves gathering comparable properties that are as similar to the subject property as possible. You calculate the average price per square foot and use the figure to find the subject property’s fair market value.
It is important that you ensure the comps are similar to the subject property in terms of features, square footage, amenities, and the number of bedrooms and bathrooms. In addition, they must be in the same neighborhood and have been sold in the recent past (preferably within the past six months).
If you can’t find properties that are exactly similar to the subject property, you can adjust the price value. The process involves assigning values to the differences and adjusting accordingly either upwards or downwards.
Sometimes, carrying out the entire process by yourself can be challenging. It is why you need to use a real estate software. Here, Mashvisor is your best ally in your investment journey.
You can find readily available real estate comps and property data on our platform. In addition, we provide a wide range of vital tools to help you carry out neighborhood and property analyses, which are essential when conducting a CMA.
