How To Create a Beneficial Comparative Market Analysis
A Comparative Market Analysis (CMA) is a popular and fairly easy method of appraisal used by real estate agents, brokers, investors and bank appraisers to arrive at a fair market value for real estate property.
The idea is straightforward.
A comparative market analysis allows the analyst to compare the sale prices of recently-sold properties in order to determine what the fair market value for a similar-type property might be if it were sold today.
For a CMA to be beneficially effective, however, there are some general ground rules that should be understood and observed. Although the principals are the same for any CMA, whether it if for single-family homes or rental income properties, our particular interest surrounds real estate investing, so this article refers only to residential income and commercial real estate property.
The following four requirements are essential to creating a CMA that will be of any beneficial value.
1. The properties must be similar in type.
The investment properties you compare must serve a similar purpose and tenancy.
For instance, you would not benefit by trying to compare a commercial office building to a residential apartment complex, a strip center to a public storage facility, or for that matter, any combination thereof.
2. The properties must be similar in size, condition and unit configuration.
A duplex, for example, is not a good comparison to a large apartment building due in part to size. Likewise, an older, outdated property in poor condition should not be expected to have the same value as one perhaps that is newer or more updated or in relatively good condition.
The same goes for configuration; a multi-family rental consisting of all one bedroom-one bath units, for instance, might not demand the same market value as one consisting of all two bedroom-one bath units.
3. The properties must be located in the same general type of neighborhood and market area.
There can be vast difference in the sale price of a commercial real estate property located in an upscale neighborhood close to shopping and freeway access compared to one located in a more remote and declining neighborhood. The same, of course, is true for the general market area; real estate values can differ greatly even between cities just a few miles apart.
4. The properties must be recently sold properties.
Although a comparable market analysis can also include currently listed properties, especially if no similar properties were recently sold, listing prices only indicate what the seller hopes to get for the property and do not necessarily reflect what it is actually worth. Therefore it's always best to include only properties that have sold recently (say within the past year or so).
Rule of Thumb
The more properties included in your comparable market analysis the better your evaluation. The important thing is to keep it "apples-to-apples."
Bear in mind that a CMA is only a less-sophisticated version of a formal appraisal and NOT a formal appraisal.