What it means
The reasoning is simple: a buyer will not pay much more for your asset than for a near-identical one available nearby, and a seller will not accept much less. Recent completed sales are therefore the best available evidence of price, better than asking prices, which reflect hope rather than agreement.
The work is in the adjustments. If a comparable property has an extra bedroom, a larger plot or a newer roof, its sale price must be adjusted downwards to make it equivalent to the subject property, and the reverse where the subject is superior.
Choosing comparables is the other half of the craft. Good ones are close in location, recent, similar in size and condition, and sold in an arm's length transaction, and most analysts prefer three to six of them so that one unusual sale cannot dominate the answer.
In a business context the same method appears as market or comparable company analysis, where a private firm is valued using the earnings multiples paid for similar businesses. A CMA is also used to set commercial rents per square foot, to price fleet vehicles and to challenge a property tax assessment.
The important nuance is the difference between a CMA and a formal valuation. A CMA is prepared by an agent or analyst as a pricing opinion and carries no professional liability of the same kind, whereas a lender ordering finance will require an independent appraisal that follows a defined standard.
In practice
Real-world examples.
Example
A homeowner receives a $415,000 offer within a day of listing. Her agent's CMA of four adjusted comparables indicated $448,000, so she rejects the offer, and the property sells three weeks later at $445,000.
Example
A commercial tenant negotiating a lease renewal builds a CMA of six recent lettings in the same district, showing an average of $32 per square foot against the landlord's proposed $38. The evidence moves the negotiation to $34 without either side needing a formal valuation.
Example
A construction company selling five used excavators prices them from completed auction results for the same model, year and hour count, adjusting for attachments and service history. The CMA supports an asking price of $86,000 per machine, roughly $9,000 above the dealer trade-in offers.
Formula
Calculation
Adjusted sale price = comparable sale price + or - adjustments for differences. Indicated value = the average of the adjusted comparable prices.
A three bedroom house is being priced against three recent local sales.
Comparable A sold for $420,000 but has a smaller kitchen and no garage, so adjustments of +$15,000 are applied: $420,000 + $15,000 = $435,000.
Comparable B sold for $455,000 with an extra bathroom and a newer roof, so adjustments of -$10,000 are applied: $455,000 - $10,000 = $445,000.
Comparable C sold for $432,000 but sits on a busier road, so adjustments of +$8,000 are applied: $432,000 + $8,000 = $440,000.
Total of adjusted prices = $435,000 + $445,000 + $440,000 = $1,320,000.
Indicated value = $1,320,000 / 3 = $440,000.
The agent would then present a range around that figure, perhaps $430,000 to $450,000, rather than pretending to a single exact number.Case study
Seen in the real world.
Harborline Realty is an illustrative, fictional estate agency used here to show how comparable selection changes an answer. Two of its agents priced the same coastal cottage in the same week and produced figures $60,000 apart.
The first agent used three comparables from anywhere in the town, including a modernised house two streets from the seafront that had sold for $520,000, and arrived at an indicated value of $488,000. The second restricted the comparables to sales within 400 metres and within six months, adjusted each for plot size and condition, and arrived at $440,000 from an adjusted set of $435,000, $445,000 and $440,000.
The property was listed at $449,000 on the second agent's evidence and sold in five weeks at $443,000. In this fictional example the arithmetic was identical in both analyses, and the entire difference came from which sales were treated as genuinely comparable, which is the point worth remembering about the method.
Watch out
Common mistakes.
- Using asking prices instead of completed sale prices. An asking price records what a seller hoped for, while a completed sale records what a buyer actually agreed to pay.
- Picking comparables that flatter the answer. Selecting only the highest recent sales produces an over-priced listing that then sits on the market and eventually sells below where a realistic price would have landed.
- Treating a CMA as a formal valuation. Lenders, courts and tax authorities generally require an independent appraisal prepared to a professional standard, and a CMA will not satisfy them.
Questions
People also ask.
How many comparables do you need?
Three at an absolute minimum and ideally four to six, so that one unusual transaction cannot pull the whole estimate off course.
How recent must the sales be?
Usually within three to six months in a normal market, and much tighter when prices are moving quickly, because older evidence describes conditions that no longer apply.
Can a CMA be used to challenge a property tax assessment?
Yes, and it is one of the most common uses, though the assessing authority will want the comparables documented with dates, addresses and the reasoning behind each adjustment.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related