A Comparative Market Analysis (CMA) helps buyers and sellers understand the fair market value of a property. At a high level this works by comparing the property in question to similar homes in the area so that you can make informed pricing decisions.
In this article we break down the steps that the best realtors take to run a CMA. This includes:
- Step 1: Analyze the Subject Property
- Step 2: Find Comparable Properties
- Step 3: Compare Features and Adjust for Differences
- Step 4: Create a Price Range
- Step 5: Consider Seller Net and Closing Costs
- Step 6: Decide on Your Pricing Strategy
** WARNING **
Step 1: Analyze the subject property
In a CMA, the agent evaluates the home you want to buy or sell, known as the subject property. For example, if you are buying or selling a detached house on Montreal’s West Island, that home becomes the subject property for the CMA.
The first step is to get a complete understanding of the subject property. Realtors will typically visit the home in person. During the visit, they inspect the home for repairs, maintenance, or renovations. The agent will also record specific details about the property, including location, property type, lot size (dimensions), number of rooms, bedrooms, bathrooms, basement (finished, unfinished, or partial), year built, and other building features such as the electrical system, heating and cooling, roof condition, garage or parking, and essentially any features that could affect the home’s value.
Some of this information comes from speaking with the homeowner or their agent, while other details are available through the Multiple Listing Service (MLS). The OACIQ (Quebec’s real-estate regulatory body) states that the realtor must confirm any information that the seller tells them. The listing agent should confirm all material information about the listing prior to listing the property. Meanwhile, and depending on the stage of the transaction, a buyers broker might do this by reviewing the sellers declaration, the certificate of location or simply request documents for proof of repairs or renovations.
Step 2: Find comparable properties
Once the real-estate agent understands the subject property, the next step is to find a list of comparable properties. These are homes in the same neighbourhood that closely resemble the subject property according to the following criteria:
- Location (within a half-mile radius or bounded by main streets)
- Property type
- Lot size (dimensions)
- Number of rooms (bedrooms, bathrooms, basement)
- Year built
To start, the realtor pulls a list of all homes in the neighborhood that sold in the past 12 months. This will most likely yield a large number of comparable properties. The agent will then filter down to the most recent transactions. They will then filter down further by adding in additional features about the subject property until they get a list of approximately 5 – 10 properties that closely resemble the subject property. The agent will then do deeper dive into these properties to see how they compare to the subject property.
Step 3: Compare Features and Adjust for Differences
Once the listing agent has 5 – 10 properties, the agent will want to further cut this this down to find the 3 – 5 properties that are highly comparable to the subject property. To do this, the listing agent will do a deep dive comparison on the comparable properties vs the subject property.
During this “deep dive,” the agent closely examines the historical prices for each property and reviews the most recent price assigned to them. The agent is looking for any kind of anomaly either in the historical price movements or the current pricing that might indicate major difference between the properties in their list of comparables. For instance, a difference in the type of foundation, roof condition, renovations and so on.
Example of how to compare comparables
Let’s say that the agent has five comparables, with the following prices:
| Comparable Property | Sale Price |
|---|---|
| Comparable 1 | $420,000 |
| Comparable 2 | $423,000 |
| Comparable 3 | $430,000 |
| Comparable 4 | $575,000 |
| Comparable 5 | $428,000 |
In this case, Comparable 4 clearly stands out as its sale price is $145,000 higher than the next closest comparable. The agent would then review the listing photographs and details for this sale to see if this purchase price was a result of the market conditions at the time of sale or if Comparable 4 is substantially different from the other properties in their list of comparables.
In our example, let’s say that Comparable 4 stands out as fully renovated, with an indoor swimming pool and much more living space than the others. The agent would likely exclude it from the final set of comparables. However, the price difference could exist for literally any reason but, the key thing is that the agent needs to be able to clearly explain it.
After eliminating Comparable 4, the agent now has four homes that closely match the subject property. The price range in last sale or list price for the list of comparables is $10,000 ($420,000 – $430,000). This moves us into step 4 which is the price range.
Step 4: Create a Price Range
Now that the agent has a list of close comparables, many agents will create a price range for the property. There are two reasons why listing agents do not generate a price immediately. This is because first, the agent must be able to explain why there is a $10,000 difference between homes in our comparables and second, pricing is ultimately a strategic decision that depends on current market momentum, not just past sales.
In this case, the subject property most closely matches Comparable 2, which sold for $423,000. Depending on the property type, the a listing agent may choose to price the property at $425,000. This is because buyers typically search in $25,000 price bands, so this positions the home at the lower end of the up-to-$450,000 range. At the same time it will ensure that no issues arise when the lender conducts their home appraisal.
Meanwhile, a buyers agent can now look at the list price with a more critical eye and even justify a price of say $420,000 or lower if, they notice that repairs are necessary during the property viewing. For instance, let’s say that when viewing the property, the buyers agent notices the subject property does not have a finished basement however all the other comprables in their CMA do. In this case, they might be able to justify a $20,000 below asking price to account for this missing feature.
By doing this kind of comparable market analysis, the buyers agent protects their client from overpaying for a property. Meanwhile a listing agent is able to go market with an accurate reflection of the properties worth.
Step 5: Consider seller net and closing costs
Before completing the CMA, the best realtors will also do a quick calculation of the sellers closing costs. These are any costs that the seller must pay to sell their home in Quebec. At a high level, the sellers closing costs are generally 3 – 5% of the home selling price. Although individual situations vary, the largest cost that sellers pay tends to be the realtors fee. Realtors normally charge at least 4% of the list price.
Once the seller knows their closing costs, it is easy to how much money the seller will pocket from the transaction at different price points.
Step 6: Decide on Your Pricing Strategy
At this point, the realtor has completed the CMA on the subject property. A good agent will now present the results of the CMA to you in an in-person meeting. This should be a non-emotional and logical discussion grounded in the comparables. Buyer’s agents protect their clients from overpaying, and listing agents set the property price appropriately, avoiding both overpricing and underpricing.
In this meeting, some agents may present a single price and explain why it works. Others will show multiple list prices strategies. They will then review each option with you, explain the rationale behind it, and guide you in choosing the optimal listing price strategy for your market. For instance, one strategy can be to go to market at slightly below the rest of the market and then run an open house in the early spring market. This can bring out a lot of potential buyers that are looking for a deal before the busy summer months and drive the price of the property upwards.
Final remarks
The best realtors truly separate themselves from the average realtors when it comes to the CMA.
For sellers, setting a good initial list price is important for several reasons, not least because overpricing can result in a low appraisal, forcing price reductions and and increase the risk of a failed sale.
Meanwhile, buyers must understand what should be a fair price for the property before submitting their promise to purchase requires the buyers agent to do a CMA of the property. Although many buyers agents will not do a CMA, how can you negotiate the purchase price of a property without knowing what the comparable home sales are in the area. In these cases, the buyers realtor relies heavily on the lenders home appraisal to ensure that their buyer is not overpaying.
Buyers also need a clear understanding of a property’s fair market value before submitting a promise to purchase. A proper CMA allows the buyer’s agent to ground negotiations in real, comparable sales rather than the sellers list price. Without a CMA, buyers risk overpaying and borrowing more than the home is worth.
