Market analysis and home appraisals often spark some confusion, especially for newer real estate investors. Others may deem these terms to be the same, despite indications of a few differences here and there. The question is: Should I stick with a real estate market analysis or do a home appraisal instead? Here is a guide explaining the two, which will help you make wise decisions on your real estate investments. Let’s look at the two:
REAL ESTATE MARKET ANALYSIS
This is often stated as a comparative market analysis (CMA). The main purpose of a CMA is to give an investor the market value of a particular real estate asset. This will give you an educated estimate on the property’s current worth. However, the property’s sales price doesn’t always reflect its true market value due to some variables thrown into the mix. To understand this, let’s discuss how a CMA is usually done.
Perform Property Analysis
This is the first step before a CMA is done. An investor should have a good understanding and knowledge of their real estate asset. There are several factors to consider when determining a property’s value: square footage; number of rooms; current condition; features and amenities and the location.
Comparing the subject to similar properties, in the same area is key. Using the factors mentioned above, you will want to look for comps that best match up to, and share similar traits with the property you plan to invest in. To be more accurate, comparables should be found using actual property listings, that have sold, are active, or pending. This will let you know what is selling in your area, and for how much. It’s recommended to use 3-5 comps for your analysis.
Set A Price Range
Now that you have the property analysis and comparables down, you can start comparing them to create a price range. Regardless of how similar the comps are to each other, and the subject property, the price range can vary widely. After you see the range of the comparables, determine your property’s value within that range.
WHO PERFORMS IT?
With the right knowledge, any real estate investor can conduct a CMA. There are a number of real estate professionals and agents in the field that can readily do this for you. It’s usually part of their service to conduct a market analysis when assisting you with your investment property purchase.
Other Uses For A CMA
In addition to helping determine a property’s value for a purchaser, a CMA can also help with rental rates. A CMA can be very helpful to a property manager, or a purchaser looking for what the rental rates are in a certain area. A CMA will also be beneficial to a seller, to help determine a selling price. A seller always wants to get the most for their property, but also wants to ask for a reasonable price, so the property does not sit on the market for a long time.
This is another method for investors to determine a property’s market value. This process usually happens when a buyer applies for a loan to purchase a home. There are three ways a home appraisal arrives at a property value.
Direct Sales Comparison Approach
Also known as Market Data Approach, this is an estimate of value when it comes to comparing the property in question with ones which have already been sold. These properties should have at least been sold within the last year, within a mile radius of the subject.
This is used to estimate the value of properties that have been improved by one or more real estate assets. Comparisons between the value of the properties, land and depreciation are separated into proper estimates. This approach is normally used in properties that don’t generate any income, such as schools, churches, and hospitals.
Otherwise known as the Income Capitalization Approach, is used when it comes to estimating the value of income-producing properties, such as rental properties, office buildings and shopping centres. This involves the return on investment that an investor makes, and the net income that the particular type of property will produce.
WHO PERFORMS IT?
This is one of the main differences between a home appraisal and a CMA. Unlike the latter where it’s usually done by an investor or real estate agent, a home appraisal can only be done by a professional appraiser. They will usually charge a fee of $300-$500. A bank, or lender is the party that usually requires an appraisal be conducted. The lender orders an appraisal to get the market value of the property, to ensure it supports the loan.
WHEN IS IT NEEDED?
Basically, whenever an investor or buyer needs funding for their purchase of the property, a home appraisal is done. The mortgage lender or bank would not approve the loan until a professional home appraisal is completed. The same would also apply when it comes to selling properties, when the buyer applies for a loan.
WHICH OF THEM IS THE RIGHT ONE?
When talking about the necessity between the two, a market analysis isn’t technically required. It’s a way to give a buyer, or seller, a quick overview of the market, to determine a property’s value. An appraisal is required when a mortgage is involved.
An appraisal report goes more in depth, than a CMA. They both look at the same basic information, and are looking for the market value, but the appraisal goes deeper into the data. For example, the appraisal will show plus and negative price adjustments for all the different features and amenities of the subject compared to the comparables. The CMA gives this info as an overview, but does not break it out.
Also, a market analysis involves the investor, agent, or broker who might be a bit impartial in determining the property’s market value. Whereas an appraisal is completed by a third party entity (appraiser) who does not have a stake in the sales transaction.
Both methods are helpful to determine a property’s value. A smart and savvy investor needs to know the market value of the property they are investing in. A CMA will give you a good quick overview of the market values, while an appraisal is more in-depth. Working with investment real estate professionals will help you make the right decisions for you. Our team of professionals at Strategy Properties can definitely help you out. To learn more about our services, contact us at (734) 224-5454 or reach out to us via email at firstname.lastname@example.org.