What is a CMA in real estate exactly? CMA stands for Comparative Market Analysis, which involves comparing a potential investment property to closely similar properties. But how does this work, and more importantly, how can investors utilize CMA to their advantage? Continue reading to find out!
Key Takeaways
- The comparative market analysis is a report showing data on the market performance of comparable properties (known as “comps”).
- CMAs look at recently sold, listed, pending, and expired properties to evaluate and gauge the potential of a property in the same area.
- Investors can use CMAs to validate their assumptions, test investment strategies, and adjust exit plans. That said, while it is a powerful estimation tool, it is not a formal appraisal and cannot be used as a legal valuation for mortgage lending.
What Does CMA Mean in Real Estate?
Comparative market analysis is a powerful tool people typically use to evaluate the potential of an income property relative to similar properties.
This is critical for investors, especially those looking to step into property management rental homes, But how?
Comparative Market Analysis (CMA) consolidates data of similar properties that were recently sold, currently listed, under contract (pending), and recently taken off the market in the same area. For example, if you’re looking at a single-family residential in Alamo Heights as an investment opportunity, your CMA will feature similar SFRs within the vicinity. They’re SFRs that are listed, sold, and taken off the market over a certain period of time.
Why CMAs Matter So Much to Real Estate Investors?
In summary, CMAs matter for investors because they gauge how much a property can sell for. Also, they give you fresh-off-the-press market-driven insights that can help you with pricing and more. Then, they help you validate what you’d be acquiring with a new property.
Let’s first go into how CMAs help you gauge how much a property can sell for. Let’s say that you found a house that you plan to rehab. At the time, you’re still not sure whether you want to develop it as a rental income property or to go ahead and sell it off the bat. When you conduct a CMA, you’ll have a better understanding of local housing conditions and see where you can gain the best returns on your investment.
Another benefit of CMAs is that the report is market-driven. This means that the data that is used comes from the most recent market conditions and reflects what is actually happening in the community you’re looking at.
Because of this, CMAs are also helpful in validating acquisition assumptions before committing to a real estate deal. Similarly, having a CMA report on hand can help investors like you ensure that strategies align with current neighborhood standards. Meaning, you’re not pricing your property (or rent) too high or too low.
How to Do a CMA Yourself as an Investor
To perform a CMA, identify a target property’s specs, find three similar comps sold within a mile over the last six months, and adjust their prices for differences to determine its final investment value.
To help you with this, here’s a more thorough rundown:
-
Identify your target property, including its exact location, overall square footage, number of rooms, lot size, age, and condition.
-
Search for at least three qualified comparable properties, taking into account the similar characteristics in terms of lot size, square footage, age, condition, etc. Typically, the area covered by a CMA is within a 0.5-mile to 1-mile radius of the target property. However, in dense urban areas, many investors stay within 0.25 to 0.5 miles to maintain consistency in their neighborhoods.
-
Round up data from comparable properties recently sold, currently listed, and recently taken off the market. The general timeframe for these is within the past 3 to 6 months for sold properties, 12 for expired ones, and 60-90 days in rapidly shifting markets.
-
In your report, perform “adjustments” to account for notable differences between properties. If a comp has a feature your property lacks, you subtract that feature’s value from the comp’s sale price. If your property has high value features the comp lacks (like a new roof), you add that value to the comp’s price. That way, you find a corrected “adjusted” value to see what it would have sold for if it were identical to your target.
-
Cross-check these adjusted values with your target property and determine if it aligns with your investment goals or risk tolerance.
How to Use a CMA to Analyze Investment Opportunities
A CMA helps investors determine accurate property values, select the best investment strategy for them based on market trends, and provide supporting evidence when they pitch deals to private lenders.
First, CMAs provide you with a realistic, market-accurate range value for a property. In your analysis, you can identify the low and high ends of valuation in the area and gain a better grasp of where your investment plan best fits. The CMA can also help you decide which investment model to pursue – whether to buy and hold, rent out, flip, and so on.
Another way that you can use the CMA is to test the feasibility of your investment plans and even adjust accordingly. If the comparative market analysis shows that property prices are declining, you can reconsider flipping and opt to rent out instead.
Lastly, if you’re at a stage where you are still looking for ways to finance your investment plan, you can use a solid CMA to back your proposal to private lenders. Keep in mind, of course, that while a CMA helps you pitch the deal, traditional banks will still require a licensed 3rd party’s formal appraisal to finalize a loan.
A Disclaimer
We’re only providing general information in this article for educational purposes only. While we aim for accuracy and reliability, the information shared is not meant to be relied on as legal, tax, financial, or specific regulatory advice. We strongly recommend that you always consult with a licensed attorney, CPA, or other qualified professional in your specific jurisdiction for advice tailored to your unique circumstances, as reading this blog does not establish a client or advisory relationship with BMG.
How Bay Property Management Group Can Help
So, what is a CMA in real estate? It’s a powerful tool that, if used properly, can provide investors like you with valuable insight into the local housing market. However, it needs to be applied strategically – from determining actual relevant and comparable properties to leveraging the CMA to align pricing strategies.
Ready to take the next step in your investment journey? Partnering with a property management company, like us at BMG, might just be exactly what you need whether you need help finding investment opportunities or looking for professional insight or advice. Interested? Contact us today and let’s talk!
