Whether you are a seller, buyer, or investor, the Comparative Market Analysis (CMA) is an essential real estate pricing tool to understand. The basic purpose is to determine the current value of the property that constantly varies based on local market activity. Many factors are taken into consideration with local market values having the greatest effect, but other influences do strongly impact the current value of a property. For instance, what is the value of a 25-year-old, 3 bedroom, 2 bath house in a specific neighborhood? How do the values change if one house has been recently remodeled and a comparative house still has the original 25-year-old kitchen? These factors and many others must be properly analyzed to arrive at an accurate CMA.
A CMA estimates a home’s value based on the recent sales of similar properties in the same area. It may sound a lot like an appraisal but there are differences. One difference is that a CMA is typically done before the house goes on the market and an appraisal is done after a sales contract has been signed – values do change over time. Another difference is the CMA is done by a real estate agent who often has an interest in the sale of the home. The appraisal is conducted by a third-party professional that does not have a financial interest in the sale of the home.
Comparable houses (aka “comps”) are the foundation of a CMA. What counts the most from a comparable house is the final sales price. The original asking price can be significantly different from the final sales price. The asking price might be unrealistically low to generate a lot of interest in the house or unusually high to keep away all but the most interested buyers. Although listing prices might be considered in a slow market or to determine a trend, the prices that count the most in an active market are the final sale prices.
The more comps the better, but traditionally a minimum of three other recent sales are used to arrive at a CMA. An effective way to establish local values is to triangulate the comps around the house being evaluated. For instance, finding three comps within a two-block radius that all have three bedrooms, two baths, are close to 2,000 square feet, and all sold in the past 4 to 6 weeks for about $300,000 is going to be a solid CMA. But there are other factors to consider.
Some factors can make the comparison unreasonable, and others can be adjusted for in the final price that is arrived at for the house being valued. Other key factors include condition, lot size, extras, and curb appeal. It’s not at all reasonable to assign the same value to a fixer-upper house as assigned to an updated house that has also been upgraded with extras like decks, finished basements, and swimming pools.
Although some of these can be adjusted for, you can’t simply add or subtract the cost of the upgrades from the market price. Typically, the best upgrades will add 80% of the upgrade cost to the value of the house but lower valued upgrades can add as little as 20% to the value. For instance, a high-quality kitchen upgrade appeals to most buyers but a sauna in the basement has limited appeal. Even a $40,000 kitchen upgrade in a neighborhood of $175,000 homes is going to be worth less than in a neighborhood of $350,000 homes.
Just as each neighborhood is unique, prioritizing which factors have the most impact is also somewhat unique to the neighborhood. This makes it important to have the CMA performed by a professional thoroughly familiar with the neighborhood. In a mostly descending order, these are common attributes to consider.
The primary reason a buyer wants to see a CMA is to make sure you aren’t making an offer that is unreasonably too high or too low. Once you understand a CMA, you can write a fair market offer that even if not accepted will become the basis for educated negotiation decisions. But even before you make an offer, a real estate agent uses CMAs to find the best financial matches meeting your needs and wishes. When making an offer, your knowledge of the CMA helps your offer hold its own against other bids, in the eyes of a seller.Perhaps most importantly, what will the appraiser’s conclusion be, and what impact will that have on a contract that you already have in place?
Without a CMA, a seller goes into the market blind as to what the property is actually worth. Not only are comparable properties important but so are current market conditions. What your neighbor sold for two years ago has very little relevance on what your home will probably sell for today. What you value your house at isn’t always important either. No matter what dollar value you put on your newly remodeled kitchen or finished basement, the market sets the value. The only price that matters when selling is the price a buyer is willing to pay.
What else do you think buyers, sellers, and investors need to know about CMAs? Please share your insights and experiences by leaving a comment.
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