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How To Use A Comparative Market Analysis To Set Your Asking Price

Rachel Burris12-Minute Read
October 22, 2020

Determining a fair asking price for your home is one of the more challenging aspects of selling real estate. You need to make sure that you set the price high enough to provide a good return on your investment and low enough to get potential buyers’ attention. To find a price that’s just right, you must know how much your home is worth.

To figure out the fair market value of a home, real estate agents run a comparative market analysis (CMA). Whether you’re in the market as a seller or buyer, this tool is extremely useful to understand. Find out what you need to run your own CMA.

What Is A Comparative Market Analysis (CMA)?

A comparative market analysis is a tool real estate agents use to estimate the value of a home. This approach to pricing property is based on the principle that you can determine a home’s worth based on how much it would cost to buy a similar, equally desirable property.

To run this analysis, agents examine comparable properties that have recently sold in the area. They typically use the resulting report to help sellers establish asking prices for their homes. However, a CMA report can also be used to assist buyers in coming up with competitive offers for properties they’re interested in purchasing.

What Are The Challenges Of Setting An Asking Price?

When setting an asking price, the goal is to identify a number that will maximize profits and still fall into your target buyers’ price range. To find that perfect price, you must begin with your home’s fair market value.

However, figuring out what your home is really worth is a kind of conundrum. Homes are worth what a buyer is willing to pay for them, but you won’t know how much someone is willing to pay for your home until you price it and put it on the market.

Therefore, you have to look at similar homes and see how much buyers were willing to pay for them to determine the appropriate asking price for yours. The only problem is that there will always be differences in the size or condition of the house, its amenities or location, the state of the market or the specifics of the sale. All of these differences impact the value of the home and must be accounted for when pricing yours.

To create comparative market analyses, agents take all of this information into consideration. They compare the home they want to price to homes that have recently sold in the area, which are known as comparable sales or “comps.” By identifying how the comps differ from the subject property, agents can adjust the sales prices accordingly and estimate the home’s value.

Running a CMA is complex and time-consuming but effective in overcoming many of the challenges regarding pricing. Let’s take a closer look at how the process works.

How Is A Comparative Market Analysis Prepared?

To prepare a comparative market analysis, a real estate agent begins by looking through recent sales to find homes as similar to the property they’re trying to price as possible. Once they have found at least three comparable properties that have sold in the area within the last 3 – 6 months, the agent pinpoints how the comps differ from the subject property.

Those differences are itemized and priced out, so the agent can use the information to adjust the purchase price of each comparable home. This adjustment allows the agent to determine how much each comp would have cost had it been nearly identical to the subject property and sold under current market conditions.

Therefore, to prepare a CMA, you must clearly understand the factors that impact a home’s value.

Factors To Consider When Comparing Locations 

The location of a property plays a tremendous role in determining how much it’s worth. Two identical homes that are located just blocks apart can have different values, which is why agents try to pick comps that are located in the same neighborhood as the property they’re pricing.

If agents can’t find at least three recent comparable sales in the area, they’ll look for comps located in areas that are considered similar based on the following factors:

  • Desirability of the neighborhood: The more coveted the neighborhood is, the more valuable the home will be. Even a home’s location within the neighborhood can make a difference in pricing.

  • School district: The quality of public schools within the local school district will also have a bearing on the property’s value. Homes in districts with higher test scores and graduation rates, as well as lower student-to-teacher ratios, tend to be worth more.

  • Crime rate: Areas with a lower crime rate are considered more valuable since they are likely to be safer than others. 

  • Proximity to amenities: Locations with access to grocery stores, restaurants and bars, shopping areas and cultural or sporting venues are more desirable than those that are more remote.

  • Privacy and noise level: Given that most people prefer to live in quieter areas, homes shielded from noise and traffic are considered more valuable. For example, close proximity to highways, active train tracks and airports tends to diminish the value of a home.

Factors To Consider When Comparing Homes

When creating a CMA report, real estate agents break down the aspects of a home that determine its value. They compare the subject property to recent sales and consider how slight differences make the comps more or less valuable than the home in question.

Comparative market analyses commonly examine the following factors:

  • Lot size: The amount of land that the home is situated on can greatly impact its worth. Even just a quarter of an acre can make a considerable difference in value. 

  • Square footage: Larger houses are typically worth more than smaller ones. While the total square footage is important, it’s also crucial to consider what the livable square footage is when calculating a home’s fair market value. The livable square footage may or may not include a basement or attic depending on local laws and whether the space has been finished.

  • Number of bedrooms and bathrooms: Bedrooms and bathrooms are paramount when determining a home’s value. A house that has more bedrooms and bathrooms is usually priced higher than one with fewer.

  • Age and condition of property: To determine a home’s worth, you must know when it was built and what condition it’s currently in. Homes that are newly constructed or recently renovated are usually more valuable than older houses that have not been updated in a while. However, historical homes can be worth more than more recent constructions, especially if they’ve been restored and continuously maintained.

  • Special features: Certain amenities, like finished basements, garages, swimming pools and fireplaces, can increase a home’s value. However, market conditions will often dictate whether they do. If homes in the area tend to possess a specific feature that the subject property lacks, the feature is more likely to undercut the home’s worth, though often only slightly.

Factors To Consider When Comparing Markets

Homes must have been sold within the last 3 – 6 months to be considered true comps because the market changes rapidly and has a huge impact on a property’s price. Remember, a house is worth what a buyer is willing to pay for it, and buyers are willing to pay more when the market is strong and less when it’s weak.

Therefore, the fair market value fluctuates based on whether the property is being sold in a buyer’s or seller’s market. A real estate agent will examine both the local and national housing markets to determine whether there have been any changes that need to be accounted for by adjusting the comps’ purchase prices. While greater inventory typically leads home prices to fall, lower interest rates often cause home prices to rise.

Agents will also look into the specifics of the comps’ sales to see if they impacted the purchase prices. The type of financing the buyer obtained can influence home value, as can the inclusion of seller concessions. For example, if a seller offered to pay for the buyer’s closing costs or make repairs to the home prior to closing, the cost of those concessions must be subtracted from the purchase price of the home to figure out its true value.

An Example Of How A Comparative Market Analysis Is Prepared

To give you a better understanding of what goes into a comparative market analysis, let’s walk through a simplified example of how one would be prepared. A couple is interested in selling their property but has no idea what it’s worth. They decide to hire a real estate agent to put their home on the market. The agent runs a comparative market analysis to determine an appropriate asking price for the home.

To begin, the agent walks through the home and reviews the public records to gather information about the homeowners’ property. Their home is part of a subdivision made up of homes built around the same time that possess the same layout.

Theirs is a 2,500-square-foot house on a .25-acre lot. The house has four bedrooms, three full bathrooms plus a half-bath, two fireplaces and a two-car garage. The house is in better condition than any of the other houses in the neighborhood. Yet, unlike the other homes, it doesn’t have a finished basement.

With this information in hand, the agent starts searching for comps. Since the home is part of a subdivision in a market that has experienced a lot of activity in the last year, the agent is able to find three comparable properties that have all sold within the last few months. The agent compiles information about the comps and subject property to begin putting the comparative market analysis together.

 

Sample comp table for property. 

After itemizing each house’s features, the agent has a clear sense of the differences between the subject property and comps. To see how these differences impact the homes’ value, the agent contacts a contractor, who provides the agent with a breakdown of what it would cost to add each feature to a home.

 

Estimated value of items in a house.

*Note: The prices above are merely conjectural and should not be considered the true value of any item.

Based on the contractor’s prices, the agent adjusts the purchase prices of each comp to determine how much it would have sold for had it been nearly identical to the homeowners’ property.

For any desirable features that the subject property lacks, the agent deducts the item’s cost from the comp’s purchase price. For any features that the subject property has that make it more desirable, the agent adds the item’s cost to the comp’s purchase price. Afterward, the agent calculates the total cost differences and adjusts the purchase prices of the comps accordingly.

Comp table showing added or lost value based on features.

The agent can then use the comps’ adjusted purchase prices to provide the homeowners with the range in which their asking price should fall: $477,200 – $496,200. If the homeowners would prefer a specific price, the agent can use the process of reconciliation to narrow it down.

The agent weights each comp according to how closely it resembles the homeowners’ property. Since Comp #1 required the fewest adjustments, it is given the highest weight. Comp #3, on the other hand, required the most adjustments, so it’s given the lowest weight.

The agent multiplies the adjusted purchase price for each comp by the assigned weight. Then, to come up with an exact asking price, the agent adds the results together.

Comp table calculations.

How Does A Real Estate Agent Use A Comparative Market Analysis?

A real estate agent will use a comparative market analysis whenever a home’s value comes into question. Therefore, this type of report can be useful for either side of a real estate transaction.

Pricing A Home

As demonstrated in the example, a real estate agent uses a CMA to determine the fair market value of a home. By creating this report, the agent can figure out what the asking price of a property should be based on current market conditions.

Furthermore, the report enables the agent to thoroughly explain to the sellers why their home is worth the indicated amount. This process is particularly important for sellers who may have unrealistic expectations of their homes’ worth, as it highlights all of the factors that go into pricing. 

Making An Offer 

Although CMAs are typically used to price homes for sellers, they can also help buyers figure out how much to offer for a home. Suppose the home a buyer is interested in is overpriced. In that case, the agent can use a comparative market analysis as evidence that the listing is worth less than ask.

CMAs can be a useful tool in negotiating asking prices. However, if a buyer is trying to purchase a home in a seller’s market, in which inventory is low, and buyer demand is high, they may struggle to negotiate regardless of what the report finds.

Comparative Market Analysis FAQs

Despite how common comparative market analyses are in the real estate world, most sellers and buyers are unfamiliar with them. To gain a deeper understanding of how and why CMAs are prepared, take a look at some commonly asked questions.

Can I Perform A CMA Myself?

Since much of the information needed to run a comparative market analysis is available by surfing the web or accessing public records, you can technically perform a CMA yourself. However, it’s the specific market knowledge and expertise that a real estate agent or REALTOR® brings to the table that make CMAs a reliable estimate of home value. Without experience, it would be challenging for you to properly select, evaluate and adjust comps.

How Are Prices Set When There Are No Recent Sales Of Comparable Homes?

There are circumstances in which it can be extremely challenging to find reliable comps. For example, a home may be located in a rural area that has seen very few sales in recent years; a home may be listed at the start of an economic downturn that renders previous sales meaningless; or a home may be so unique that it’s impossible to find anything like it.

In situations like these, where there are not enough recent sales to run a comparative market analysis, real estate agents will look to listings currently on the market, pending or even expired. Since offers have been accepted already, pending sales provide a better indication of value than the other types of listings. However, current listings shed light on the current competition while expired listings can give insight into the kinds of prices buyers think are too high.

Is A Comparative Market Analysis The Same As An Appraisal?

Although they are similar in their process and final product, a comparative market analysis is not the same as an official appraisal. While a CMA is created by a real estate agent to estimate a home’s value, an appraisal is a home valuation that must be conducted by an appraiser.

Like a real estate agent, an appraiser will review comps and take current market conditions into consideration when figuring out a property’s fair market value. However, an appraiser will also conduct a thorough inspection of the home to gain more insight into its condition.

While an appraisal is considered to be an objective valuation, a CMA is intended to estimate value with a client’s goals in mind. Therefore, the CMA is often thought to be the better option when deciding on an asking price or a competitive offer.

Summary: Know The Value Of What You’re Selling And Buying

A comparative market analysis is a highly effective tool for estimating the value of real estate. By basing pricing on recent sales of comparable homes, CMAs help ensure that sellers list their homes for prices buyers are willing to pay. Furthermore, these reports help ensure that buyers make offers that are persuasive enough for sellers to accept.

Although you can try to prepare a CMA yourself, it’s best to work with a licensed real estate agent. Agents have the experience, skills and market knowledge to ensure that the right comps are selected and sales prices are adjusted properly. If you would like help preparing a comparative market analysis, contact Rocket HomesSM,  and we’ll match you with one of our Verified Partner Agents.

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Rachel Burris

Rachel Burris is a writer covering topics of interest to present and future homeowners, as well as industry insiders. Prior to joining Quicken Loans, she worked as an English teacher for the New York City Department of Education and a licensed real estate agent for Brown Harris Stevens. She holds a bachelor's degree in creative writing from Bucknell University, a postbaccalaureate certificate in psychology from Columbia University and a master's degree in English education from Teachers College, Columbia University.