If you've recently launched a real estate agency or a real estate investing business, or you operate a business that owns a lot of real estate assets, then you're going to come across comparative market analysis at some point in your operations. A CMA is a way to estimate, with reasonable accuracy, the value of your property in the current market. This helps you make the best decisions about whether to sell or buy property assets so they don't languish in your portfolio.
What is Comparative Market Analysis?
A comparative market analysis is an evaluation of a property's value in the current market. It works by comparing the subject property with properties of a similar type, size and condition that have recently sold in the same neighborhood. By looking at the selling price of the so-called "comparable" properties, you can make a good estimate of what the subject property is worth. Real estate agents use CMAs to value all sorts of property including residential, office and industrial real estate, and investors use it to figure out whether a potential investment is worthwhile.
Why Do Real Estate Businesses Need Comparative Market Analysis?
If you've opened a real estate agency, it's fairly obvious why you need to carry out a comparative market analysis – it's one of the most valuable documents you can offer your client. A CMA is an essential part of listing homes for sellers at the right price so they don't leave money on the table. It's also essential when making offers on behalf of home buyers so they don't pay a dime more than the home is worth. You can also use CMAs as a marketing tool to generate business by showing homeowners how much they could get if they sold their home with you today.
What About Other Businesses?
For other businesses, a CMA can help you keep track of the value of your business. If you own a lot of retail stores, warehouses and other property assets, as an operator or investor, then the value of your business will be hugely affected by fluctuations in the value of these tangible assets. A CMA can be critical for selecting the optimum time and price for selling, buying or replacing individual properties. It also adds weight to your business valuation if you're selling your business as a whole.
How to Do a Comparative Market Analysis
Start by listing the attributes of the property you're valuing, for example, a 1,000 square feet retail store with storage facilities, kitchenette and bathroom in a busy shopping district. Next, you're going to look for stores with comparable attributes that have sold in the same neighborhood over the last three-to-six months. A real estate agent can look up sold, expired, active and pending listings on the multiple listing services; other businesses should check out real estate websites such as Zillow or Trulia. Pull up at least three "comparables" and review their selling prices. Average these prices out, and you'll have a good estimate of your property's value.
Making Quality Adjustments
Sometimes, there aren't a lot of comparables in the neighborhood, especially when you're attempting to value commercial property. You might find only larger properties or stores located on a side street with fewer passersby. Now, you have to try and identify what each difference is worth. For example, you might calculate the average selling price per square foot of larger or smaller stores, then multiply that by your subject property's square footage to get an estimated market value. Or, you might deduct $5,000 from the value of your property if it's in poor condition and needs approximately $5,000 worth of repairs. Valuation is more art than science, and the results are much more accurate when you're comparing apples to apples. The more differences there are, the more comparables you'll need to find.
Jayne Thompson earned an LL.B. in Law and Business Administration from the University of Birmingham and an LL.M. in International Law from the University of East London. She practiced in various “Big Law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com.