If you are currently house-hunting or if you have just listed your property on the market, thinking of the value to price your property at or making sure that you will pay no more than the fair market value of a property can be very challenging. Coming up with a reasonably accurate estimate for the fair market value of a home can be difficult, considering the set of factors that need to be taken into account in assessing a property's actual worth. Real estate agents are fully aware of this difficulty which is why professionals in this line of business conduct what is called Comparative Market Analysis (CMA).
What is Comparative Market Analysis in Real Estate?
The most common method used to value residential real estate is Comparative Market Analysis. It is a tool that helps to determine the fair market value of a landed property, a condominium or a HDB flat by evaluating similar properties that are recently sold in the same area.
The property characteristics that form an important part of comparative market analysis include the property's location and age, communal facilities (for private non-landed properties), number of bathrooms and bedrooms, the level of the unit (for both HDB and condominium units), desirable features such as a pool, lift, home theatre room and wine cellar (for landed properties), the current condition of the building or unit, renovations and built-up area.
How do Comparable Sales influence the Comparative Market Analysis?
When appraising the fair market value of a residential property using Comparative Market Analysis, several pieces of information are required.
The analysis is done by selecting and compiling information regarding the purchase price of at least three similar properties sold within the past 3-6 months, in the same area. The information collated from past transactions becomes the subject property's comps. Comparable Sales or comps refer to the compiled information regarding the attributes of selected properties recently sold that are identical or closely similar to the features of the subject property in the same neighbourhood. It assesses and attaches a fair market value to the subject property. Buyers and sellers can then negotiate a price based on the assessed fair market value of the subject property derived from comparative market analysis.
In Singapore, the government publishes the prices of private non-landed residential transactions on the URA website. Data for HDB resale flats can be found at the HDB website.
If there are no recent purchases of house property in the proximity of the subject property, other information sources such as current market listings can be used to compile the comps, However, it is worth noting that the asking prices found on current property listings are usually priced higher than the fair market value.
Here's a list of components included in the CMA
- Built-up area
In Singapore, comparable market analysis for landed properties is carried out based on the land size as opposed to the built-up area in some other markets like Hong Kong. Having a bigger built-up area adds value to a property.
- Square footage (land size)
The land size of the house significantly affects its value. The bigger the plot, the more valuable the property. However, one must also consider the shape of the land the property is sitting on. An odd shaped land plot (triangular, trapezium) is less desirable than a regular shaped land plot (rectangular). A house with a long frontage is also more valuable than a house with a short frontage.
- Age and condition of the property
The house or condominium development's actual age is a factor in the property's valuation. The use of quality materials and recent renovation and upgrading are characteristics that can enhance the residential property appraisal. For instance, recently refurbished historic homes can have high purchasing prices. The same applies to HDB estates that are recently upgraded.
- Number of bedrooms and bathrooms
More bedrooms and bathrooms constructed inside the house can boost its value.
- Special features
Having special features like swimming pools, patios, finished basements, and garages can boost the house's value. The better the amenities available, the more the property is worth.
- Floor of Unit
The higher the floor of the unit, the more valuable it is.
- Date of sale
The property assessment must adjust to the conditions in the market. For example, government measures such as the adjustment of stamp duty or additional buyers stamp duty affect the demand for residential properties. Likewise, mortgage rate movements also affect demand. A property valuation changes according to changes in the market condition. So, when carrying out comparative market analysis, it is important to use comparable sales transactions that are carried out when market conditions are the same. Once the market conditions change, the fair market value will have changed. Although the rule of thumb is to use market comparables for the past three to six months, once the market condition changes, the comparables used may no longer reflect the market.
How to calculate CMA or Comparative Market Analysis
The Comparative Market Analysis is calculated by measuring the living area of your property and multiplying it by the price per square foot of the comps selected. Using the highest and lowest data points reflecting the purchase prices of three or four similar residential properties, you end up with a range of values. The CMA result is the average. The lowest price per square foot comp multiplied by the number of square feet of the subject property defines the low end of the range. Similarly, the highest price per square foot comp multiplied by the number of square feet of the subject property will give the high end of the range.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.