Understanding CMA – Comparative Market Analysis »RealtyBizNews: Real Estate News
Whether you are a seller, buyer or investor, Comparative Market Analysis (MCA) is an essential property pricing tool to understand. The basic objective is to determine the current value of the property which is constantly changing depending on the activity of the local market. Many factors are taken into consideration, with local market values having the most effect, but other influences have a big impact on a property’s current value. For example, what is the value of a 25 year old, 3 bedroom, 2 bath house in a specific neighborhood? How do values change if a house has been recently renovated and a comparative house still has the original 25-year-old kitchen? These factors and many more must be properly analyzed to arrive at an accurate CMA.
A CMA estimates a home’s value based on recent sales of similar properties in the same area. It may sound a lot like an assessment, but there are some differences. One difference is that a CMA is usually done before the house is put on the market and an appraisal is done after signing a sales contract – values change over time. Another difference is that the CMA is performed by a real estate agent who often has an interest in the sale of the house. The expertise is carried out by a professional third party who has no financial interest in the sale of the home.
Comparable houses (aka “comps”) are the basis of a CMA. What matters most to a comparable home is the final sale price. The initial asking price can be very different from the final selling price. The asking price may be too low to generate much interest in the home or abnormally high to drive all but the most interested buyers away. While listing prices can be considered in a slow market or to determine a trend, the prices that matter most in an active market are the final sale prices.
The more lineups the better, but traditionally a minimum of three more recent sales are used to arrive at a CMA. One effective way to establish local values is to triangulate the compositions around the assessed house. For example, finding three models within a two-block radius that all have three bedrooms, two bathrooms, nearly 2,000 square feet and all sold in the past 4-6 weeks for around $ 300,000 will be a strong CMA. But there are other factors to consider.
Some factors may make the comparison unreasonable and others may be adjusted in the final price obtained for the home being appraised. Other key factors include condition, lot size, extras, and curb appeal. It is not at all reasonable to place the same value on a home in need of renovation as you do on a renovated home that has also been upgraded with extras like decks, finished basements and swimming pools.
While some of these can be adjusted, you can’t just add or subtract the cost of upgrades from the market price. Typically, the best upgrades will add 80% of the upgrade cost to the value of the home, but lower value upgrades can add as little as 20% to the value. For example, a high-quality kitchen upgrade appeals to most buyers, but a basement sauna has limited appeal. Even a $ 40,000 kitchen renovation in a $ 175,000 neighborhood will be worth less than in a $ 350,000 neighborhood.
Just as every neighborhood is unique, prioritizing the factors that have the most impact is also somewhat unique to the neighborhood. It is therefore important that the CMA be carried out by a professional who knows the neighborhood perfectly. In mostly descending order, these are common attributes to consider.
- Location of the property.
- Number of bedrooms and bathrooms.
- The square footage as well as the lot size / square footage of each property.
- Similar Style: Use a ranch style house to compare to another ranch style house.
- Age of construction.
- Improvements, additions or amenities that distinguish one home from another.
- State of each property.
- All interior finishes that could add or subtract value from each property.
- Exterior and landscaping.
- Community attributes: crime rate, school district, closed neighborhood, golf course with or without clubhouse, fitness facilities, walking distance to shops, restaurants or other desirable amenities.
- Other nuances: public transportation, a busy corner or street, a poorly designed floor plan, and more.
The main reason a buyer wants to consult a CMA is to make sure that you are not making an unreasonably high or low bid. Once you understand a CMA, you can write a fair market offer which, even if not accepted, will become the basis for informed trading decisions. But before you even make an offer, a real estate agent uses CMAs to find the best financial match to meet your needs and wants. When making an offer, your knowledge of CMA helps your offer stand up to other offers in a seller’s eyes. Perhaps more importantly, what will the appraiser’s conclusion be and what impact will that have on a contract you already have in place?
Without CMA, a seller enters the market without knowing what the property is really worth. Not only are comparable properties important, but so are current market conditions. What your neighbor sold two years ago has very little impact on what your house is likely to sell today. What you value your home for doesn’t always matter either. Whatever dollar value you place 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 do you think buyers, sellers and investors need to know about CMAs? Share your ideas and experiences by leaving a comment.
Additionally, our weekly Ask Brian column welcomes questions from readers of all levels of experience with residential real estate. Please send your questions, inquiries, or story ideas to [email protected]
Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.