When buying a home, it’s important to get a thorough understanding of the property’s fair market value.
Real estate trends and statistics are constantly fluctuating based on the health of the economy, specific events, available inventory, and/or the level of volatility in the marketplace. These trends will ultimately be reflected in sale prices and home values.
Examining comparable homes in the neighborhood will help you gauge a property’s value, therefore giving you the insight needed to make a competitive offer.
Comparative Market Analysis Explained
A comparative market analysis is an estimate of a home’s value based on similar, recent sales in the nearby area.
It can be very challenging to accurately determine how much a specific property is worth. There are many important factors to consider, like location, condition, age, construction, square footage, etc. Additionally, both local and nationwide residential market trends should be added to the equation as well.
Overall, figuring out a home’s value is easier said than done. It takes extensive research and a good understanding of the market, past and present.
Most of the time, your real estate agent will research comps (comparable listings and sales) in the neighborhood and prepare the market analysis for you.
You could also research sale records and estimate the home’s value yourself. It’s all public information and knowledge, accessible online through many of the major real estate websites.
Understanding Comparable Sales
Comparable sales, or comps, are recently sold homes that closely resemble the property you’re interested in.
For example, if you’re looking to make an offer on a 5-bedroom colonial, it’s best to find similar style and sized homes in the immediate area. You can see what these homes were sold for and analyze whether your potential house is priced correctly.
On the other hand, you wouldn’t want to compare different types of houses, like a 4-bedroom single family home with a 2-bedroom duplex, even if they’re located near each other. These homes do not share similar characteristics and should be priced differently.
How To Make a List of Comparable Sales
Creating a comparative market analysis may seem like a complex process, but it really just involves sufficient research and breaking everything down into specific factors and categories.
It’s best to start with a list of similar homes within a 10-mile radius that have sold in the last 6 months. If you’re not getting many results, try widening the search to include properties that are currently for sale or pending.
When compiling this list of comparable homes, here are the various factors to take note of.
When an appraiser determines a home’s value, a part of the decision is based on size. This is done by comparing similar homes based on their square footage. You can use this technique in a market analysis as well.
Square foot pricing slightly varies from house to house. You can, however, figure out the average price per square foot in a specific neighborhood.
Start by adding up the square foot cost of each recent sale in the area. Then, divide that sum by the number of homes included.
For example, let’s say there are three nearby homes that all sold for $300,000. The first property sold at $200 per square foot, the second property sold at $175 per square foot, and the third property sold at $150 per square foot.
200 + 175 + 150 = 525
525 / 3 = 175 (the average price per square foot)
You can then take this average and apply it to the square footage of the home you’re interested in, giving you a solid foundation when determining its value.
Number of Bedrooms and Bathrooms
Here’s a good rule of thumb to follow – the more bedrooms and bathrooms a house has, the higher its value.
Find homes with the same bedroom to bathroom ratio and see what they were sold at.
The year the house was built will factor into its overall value as well. Find comparable homes that were built around the same time, ideally within the same decade as your potential house.
New construction typically uses more modern, higher-end materials and may be priced higher. Although, historic, older homes are also highly sought after, therefore increasing the purchasing price.
When comparing specific homes, they should all be located within the same neighborhood or general vicinity.
Location carries a lot of weight in terms of a home’s value. Schools, crime rate, noise level, and proximity are all significant factors that will influence prices.
Features and Condition
Special, unique features can drive up a home’s value. This includes fireplaces, pools, outdoor patios and decks, garages, large driveways, finished basements, etc.
Many homebuyers will even consider these amenities non-negotiables, which will increase competition and decrease inventory, therefore resulting in higher purchase prices.
You’ll also want to analyze comps based on their current condition, past renovations, and any upgrades they require, like a new oil burner, central air conditioning, updated bathrooms, etc.