Real estate investors are in the business of profiting from real estate transactions, whether flipping or long term rent and hold deals. A fundamental requirement for profitability is the calculation of the current market value of the property they’re considering buying or selling. Real estate professionals do this every day with a process they call a CMA, Comparative Market Analysis. Here are the basic components of this valuation process:
Subject Property: For our example here, you’re considering purchasing a home for a long term rental investment. You take down all of the facts about the property and its characteristics and features. This includes number of bedrooms, baths, garage spaces, square footage and lot size.
Comparable Sold Properties: Next, you find several recently sold properties that are as similar as possible to the subject property in size and characteristics. It’s very important to get sales as recent as possible and as nearby as you can, preferably in the same subdivision or neighborhood.
Sold Price Adjustments: It’s very rare that you’ll find three or four properties identical to your subject property. They will have differences, perhaps more or fewer bedrooms or baths or different lot sizes, etc. The adjustment process is much like the one that appraisers use:
You need to get an approximate market value for a bedroom, bath, garage space and even a lot size adjustment value per acre or square foot.
Next, you apply these values plus-or-minus to adjust the price the comparable home sold for to more accurately reflect what it would have sold for if identical to your subject property. In other words, if the comp home has one more bedroom than your subject property, you should subtract the value of a bedroom from the comp’s sold price. Of course, it goes the other way if the subject property had one more bedroom than the comp; you’ll have to add the value of a bedroom to the comp’s sold price.
You’ll do this for any significant feature differences, such as number of baths, lot size, etc. This adjusts those sold prices to be more like they would have been if the homes had been just like your subject property.
Then you average their per-square-foot sold prices and multiply that number by the square footage of the subject property to come up with the approximate current market value based on homes that sold recently.
This isn’t rocket science, and there are subjective variables, so understand that this is an estimate of market value, not a hard required price a buyer must pay.DClark
Real estate investors are in the business of profiting from real estate transactions, whether flipping or long term rent and hold deals. A fundamental requirement for profitability is the calculation of the current market value of the property they’re considering buying or selling. Real estate professionals do this every day with a process they call a CMA, Comparative Market Analysis. Here are the basic components of this valuation process:
Subject Property: For our example here, you’re considering purchasing a home for a long term rental investment. You take down all of the facts about the property and its characteristics and features. This includes number of bedrooms, baths, garage spaces, square footage and lot size.
Comparable Sold Properties: Next, you find several recently sold properties that are as similar as possible to the subject property in size and characteristics. It’s very important to get sales as recent as possible and as nearby as you can, preferably in the same subdivision or neighborhood.
Sold Price Adjustments: It’s very rare that you’ll find three or four properties identical to your subject property. They will have differences, perhaps more or fewer bedrooms or baths or different lot sizes, etc. The adjustment process is much like the one that appraisers use:
You need to get an approximate market value for a bedroom, bath, garage space and even a lot size adjustment value per acre or square foot.
Next, you apply these values plus-or-minus to adjust the price the comparable home sold for to more accurately reflect what it would have sold for if identical to your subject property. In other words, if the comp home has one more bedroom than your subject property, you should subtract the value of a bedroom from the comp’s sold price. Of course, it goes the other way if the subject property had one more bedroom than the comp; you’ll have to add the value of a bedroom to the comp’s sold price.
You’ll do this for any significant feature differences, such as number of baths, lot size, etc. This adjusts those sold prices to be more like they would have been if the homes had been just like your subject property.
Then you average their per-square-foot sold prices and multiply that number by the square footage of the subject property to come up with the approximate current market value based on homes that sold recently.
This isn’t rocket science, and there are subjective variables, so understand that this is an estimate of market value, not a hard required price a buyer must pay.DClark