When buying or selling a home, having a clear understanding of its worth is very important.
You'll want to make sure you don't pay too much when buying, but want the seller to accept your offer. Pricing your home when you are selling it is also tricky, making the price attractive to buyers but not selling it for too little.
While you might have ideas about what a home is worth, your real estate agent has the tools and experience to find the right price point.
Whether you are a buyer, seller, or newly licensed real estate agent, it is crucial to understand a comparative market analysis (CMA) and how it works. Agents use a comparative market analysis to find what a home is currently worth.
The comparative market analysis provides data so buyers and sellers can make sound decisions. For the seller, it is the correct list price for their home, and for the buyer, it's the amount they should pay.
Real estate agents can use recently sold data for other homes in the same area to establish the current market value. The appropriate data can help you when buying a property so that your offer is competitive.
Buyers stand a much better chance of landing the home when their offer is on point. When you're selling a home, the CMA can reveal the best price to ask in your listing.
Comparable properties or comps must be found to ensure the comparative market analysis report is as accurate as possible.
These comps are homes that have sold recently, are close to the property in question, and have similar square footage. Other similarities, like the number of bedrooms and bathrooms and the home features, are also significant.
There could be a home nearby that was recently sold, but it won’t make a good comp if it has a significant difference in square footage or has a few more bedrooms.
Your real estate agent will use data from the multiple listing service (MLS) to find homes that have sold nearby in the last three months. If enough homes that sold during the previous three months can't be found, data going back to 6 months can be used, or data from similar areas can help with the assessment.
Consideration will be given to the number of bedrooms, bathrooms, square footage, features, data of construction, and more. Let's look at some of these factors more closely:
Since real estate markets are always on the move, only comps sold recently should be used. The price a home might get today could be considerably different from the amount it would have sold for a year ago.
The time it took for the home to sell (days on market) could also play a role in having accurate pricing.
Even in the same city, there can be significant differences between prices, so the comps should be located in the same area. Sometimes it isn’t possible to find any nearby comps, perhaps because the market has been slow or if the home is located in a more rural area.
If there aren't many comps available, home sales in similar areas can be used. The real estate agent will look for areas with similar conditions like crime rates, school ratings, and amenities.
If one of the comps was sold to a cash buyer, it could mean that the price was lower, and there could be other terms that affected the price. This won't be a fair reflection of the market value of the home, so the comp shouldn’t be used.
The real estate agent is looking for up to five comparable properties that can be used to compare the subject home. They have the job of finding suitable enough sold homes, and they can also use houses that are currently for sale, under contract, and maybe even expired listings.
When your agent is happy with the comparable homes they have found, they can begin looking at the differences between the properties. Though your Realtor was previously looking for similarities, the differences become significant.
The agents will look at each comp, making adjustments to the sale price based on the differences from the subject home.
Subtraction will be made to the sales price if the comp has better features, and worst features mean adding something. So if the comp has an extra bedroom, a deduction will be made to the price. If the comp was worse overall, an amount would be added to the price.
This idea is to make the comps equivalent in as many ways as possible to the home being valued.
Let's look at an example. If a comp sold for $352,000 and everything else was similar except it was more extensive at 2,200 square feet. It would mean the home sold for $160 per square foot.
If your home is 2,000 square feet instead, $320,000 could be a reasonable price to list it for.
However, when using comps to work out the home's value, you can't just rely on one comparable. There could be other reasons why that home sold for the amount it did, so using at least three comps gives you a better understanding of the right price.
If another one of the comps was a similar size but benefited from an inground pool, it could have added around 5% to the sale price, depending on the market.
If the home sold for $360,000, a 5% reduction in the sales price would bring it down to $342,000. In this case, the house would have sold for $171 per square foot.
From just these two examples, listing your home for between $320,000 and $342,000 would seem the right range, but a third could make a big difference.
Real Estate agents also shouldn't fall in love with using price per square foot in their analysis. There are too many variables at play to rely on one metric.
The price per square foot does not account for numerous things, including the location. The location is a significant factor in accurately pricing homes.
By emphasizing the price per square foot too much, the odds will go up that there could be an appraisal gap.
When your Realtor has compiled a CMA, you can use it to help you judge what the best price is in your situation. If you are selling, it is generally better to list your home nearer to the top of the CMA so that there is space to negotiate.
When you are buying, making an offer closer to the bottom of the CMA could be better. But the market conditions need to be factored into this decision. If there are a lot of other competing buyers, you’ll want to offer more to make sure you get the home you love.
For example, if it is an extreme seller's market, the prices of homes could be escalating so fast that the sold data does not paint an accurate picture.
For example, prices have shot up much quicker than what the comps say homes are worth. The same can be said when it turns to a buyers market. You can undoubtedly see prices go the other way quickly.
Before investing in real estate, it is always good to speak with a local real estate agent who has a pulse on where the market is headed.
A CMA is an integral part of accurately coming up with the fair market value of real estate. Remember that data does not lie, but real estate agents sometimes do.
When evaluating comparative market analyses from multiple agents, pay close attention to the data. Do the homes look similar to yours or not?
Pricing is a skill and an art. Not every agent will price homes correctly. Part of your job as a buyer or seller is to make sure they do.