What is a Comparative Market Analysis in Canada?
Here we define Comparative Market Analysis, why it’s used and its key aspects.
A Comparative Market Analysis is used in real estate to estimate a property’s value. This is done by comparing it to recently sold properties with similar characteristics in the same area. This method primarily aids sellers in establishing a competitive listing price and assists buyers in determining appropriate offer amounts. Additionally, it serves as a basis for negotiation by providing objective pricing criteria.
Purpose and Scope
The primary purpose of a Comparative Market Analysis is to assist property sellers with pricing strategies while providing buyers with data-driven insights for price offers. Real estate professionals rely on CMAs to present factual evidence during negotiations. They may also be used in estate settlements and bankruptcy contexts. A CMA provides a framework for presenting data supported by factual evidence rather than subjective assessments
Guarantors vs. Co-signers
A notable difference exists between a guarantor and a co-signer. Unlike a co-signer, a guarantor does not have a claim to the asset bought by the borrower. If the borrower defaults, the guarantor becomes liable for the remaining obligation, which they must fulfill. Failure to do so can result in legal action against them.
Co-signers are typically involved when the borrower’s qualifying income is lower than required. Guarantors, on the other hand, usually come into play when the borrower has a sufficient income but a poor credit history. Co-signers share ownership and responsibility from the beginning of the agreement, while guarantors only step in if the borrower defaults on the loan.
In rental agreements, a co-signer shares responsibility for rent payments from the start, whereas a guarantor only becomes responsible if the renter fails to pay. For loans, guarantors are only alerted if the borrower defaults, not for any initial payments. A guarantor’s credit history can be adversely affected if they need to fulfill the loan obligations, potentially limiting their ability to secure future loans.
Methodology
Identification of Comparable Properties
The first step in conducting a Comparative Market Analysis involves identifying properties comparable to the subject property. Comparables, often termed “comps,” are selected based on similarity in location, size, age, architectural style, construction materials, and condition. These properties must be ones that have been sold recently, generally within the past six months, and they must be located in the same neighbourhood or area as the subject property. The goal is to choose properties that most closely match the subject property in these specific parameters to ensure an accurate comparison.
Analysis of Sales Data
Once comparable properties are identified, the next step involves gathering data on their sales prices. It is essential that these sales be transactions made at “arms-length.” This means the sales must exclude any that are not indicative of true market conditions, such as foreclosures, or transactions between relatives. This ensures that the data reflects genuine market conditions. Analysts review this data to derive an implied price range for the subject property.
Adjustments for Property Differences
Next, compensations need to be made for any important variances between the subject property and its comparables. Adjustments may relate to differences in market conditions, location desirability, physical characteristics, number of bedrooms and bathrooms, age of the property, and its general state of repair and presentation. Through these adjustments, analysts aim to refine the implied market valuation of the subject property more accurately, reflecting true comparables in value.
Consideration of Current Listings
A Comparative Market Analysis also considers active listings in the same area that are similar to the subject property. This shows present market competition and provides insights into current asking price trends within the area. However, active listings help clients understand potential competing properties rather than price substantiation. They help develop a view of market saturation and availability that complements sales analysis.
Components of a CMA Report
Descriptive Information
The Comparative Market Analysis report contains a comprehensive description of the subject property and the selected comparables. This includes the address, architectural elevation, floor plan description, total square footage, and the number of bedrooms and bathrooms. Descriptive elements help clients understand all the variables at play.
Sales Price Information
The analysis includes comparable sales prices and any adjustments made to disparities with the subject property. Showing these prices helps clients make more informed decisions based on actual transaction data.
Adjusted Sold Price per Square Foot
The report also details the adjusted sold price per square foot for comparables. This data point further enhances precision in price assessments and helps define an objective market value range by homogenizing features to a common measurement baseline: per-square-foot costs.
Price Range
The report concludes with a reasonable price range for the subject property, derived from the previous analyses. This price range provides sellers, buyers, and related parties with actionable data that reflects the property’s standing against market standards.
Approaches to Value
Market Data Approach
This primary technique, also known as the Sales Comparison Approach, forms the backbone of CMAs. It contrasts the subject property with similar properties sold recently within the same geographic area. It is widely used due to its fairness in representing open market principles grounded in actual transaction data.
Cost Approach
While traditionally linked with appraisals, the Cost Approach can inform CMAs. It establishes property value by calculating the cost of land and building, less accrued depreciation. In contexts where construction costs and replacement valuations matter, its inclusion can be beneficial, although it’s less used than the Market Data Approach.
Income Approach
Principally employed for income-producing properties, this approach estimates value by applying a capitalization rate to net operating income. It’s primarily used for properties generating revenue streams, as it offers a way to correlate income potential to value.
CMA vs Appraisal
A Comparative Market Analysis is different from appraisals in terms of who conducts them and for what purposes. CMAs may be created by real estate agents and brokers,, while appraisals are exclusively conducted by certified appraisers. Although CMAs offer estimative pricing solutions for negotiation and listing scenarios, appraisals focus on establishing property value officially for lending assurance or legal matters.
Eligibility and Data Sources
Licensed real estate professionals can perform a CMA, but must clarify their role and not misrepresent themselves as certified appraisers. These professionals often source data from the Multiple Listing Service® or other property listing platforms to ensure they use recent and comprehensive transactional data. This comprehensive data access is vital in developing thorough and credible analyses that clients can rely on to make informed decisions.