What is a CMA?
The purpose of a CMA (comparative market analysis) is to establish an accurate range of value for a property that a seller wishes to sell or a buyer wishes to buy. An accurate range is one that reflects market conditions at the time and place of the desired transaction. Once an accurate property value range is determined, the further purpose of a CMA is to help sellers identify an asking price and buyers identify an offer price. In other words, a CMA provides an objective, market-driven starting point for pricing properties.
CMAs for Home Sellers:
Every agent has a story (probably many stories!) of sellers who overestimated the value of their home. Many factors can contribute to this misperception of value. Sellers might hear exaggerated sales amounts for neighboring homes through local gossip. They might apply broad market trends and simplistic assumptions to come up with an unreasonably high value. They might believe they can recoup the cost of every home improvement they have made over the years. Perhaps above all, they are likely to attach a high value to their home based on their emotions and pride of ownership.
A CMA provides the data and reasoning to help sellers see not only what the value of their home is, but why that value is accurate. Sellers who can see and understand the objective logic for valuing their home are more likely to list their home at an accurate price for its market. As a result, they are also more likely to sell their home quickly and efficiently. Owners who are able to sell promptly avoid much of the stress and disruption of repeated showings of their homes. If they are under pressure to move—for example, to follow a job or downsize to a more affordable home—an efficient sale saves them further anxiety.
- Sellers receive a fact-based, objective assessment of their home's value
- Sellers don't experience the stress and disruption that can occur when homes languish on the market.
- Sellers are protected from undervaluing their home, to their financial disadvantage.
- Sellers avoid the delay that occurs when they accept a high offer and the property does not appraise.
By the way, sellers are sometimes prone to undervalue their property—such as when an estate is interested in selling a home quickly to distribute the proceeds. A CMA helps protect sellers against undervaluing as well as overvaluing a home.
CMAs for Home Buyers
Buyers are often at a great disadvantage in knowing the market value of a home on which they want to make an offer. If they are first-time homebuyers, they might be especially naïve about the many variables that affect the market. If they are moving to a different location—even if just to a bordering town—they could be unaware of local trends that differ significantly from those of their current neighborhood.
A CMA allows buyers to make offers based on objective data relevant to the specific market. Buyers are less likely to make a lowball offer in a competitive market, potentially losing the home to another buyer. They are less likely to make a too-high offer that eventually is scuttled because a lender won't offer a mortgage at that price. And they are less likely to overpay for a home, thus freeing up their financial resources for other important life expenses.
- Buyers receive fact-based, objective information about homes where they might not be familiar with the local market.
- Buyers are less likely to lose the home they really want because their offer is too low.
- Buyers are less likely to encounter problems obtaining a mortgage because the house appraises below offer price.
- Buyers are less likely to overpay for a home, thus preserving financial resources for other important home and life expenses.
NOTE: Comparables should be as similar as possible to the subject property.
Agents preparing CMAs must consider a variety of characteristics in identifying potential comparables, including:
- Date of sale of the property
- Location
- Size
- Amenities (e.g., pool, security system, fenced yard)
- Floor plan or style
- Age
- Number of bedrooms and baths
- Garage size
- Improvements (e.g., additions, new roof, new appliances, cosmetics)
- Potential negatives (e.g., busy street, near business/industrial)
Of these, date of sale, location, and size are the most important.
Not the Same: CMAs and Appraisals
A CMA reflects a licensed real estate broker's analysis of similar, recently sold properties to derive an indication of the probable sales price of a particular property. It is not an appraisal and should not be referred to as one.
Market Value Definition According to Fannie Mae
(Federal National Mortgage Association)
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated;
- Both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
- A reasonable time is allowed for exposure in the open market;
- Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The Role of Supply and Demand in Pricing
Supply and demand is the principle that the value of any good or service will rise as demand increases and supply decreases, and fall as demand decreases and supply increases. This principle might be more familiar to real estate agents as embedded in the concept of buyers' and sellers' markets:
Sellers' market conditions exist when the demand for homes to purchase is high and the supply is low. Home prices are generally heading upward in a sellers' market.
Buyers' market conditions exist when demand is low and supply is high. Home prices are generally flat or heading downward in a buyers' market.
Absorption Rate
We can determine more precisely what market conditions exist by calculating the absorption rate. The absorption rate is an estimate of the rate at which a particular classification of properties for sale or lease can be successfully marketed in a given area. To analyze supply and demand, an absorption rate must be developed.
To calculate absorption rate, you need to determine the number of competitive properties currently on the market and divide that number by the number of properties that have been selling per month. This does not take into account the number of houses that will eventually come on the market in addition to those already for sale.
Pricing and the REALTOR® Code of Ethics
When an opinion of value or price is prepared other than in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer, the opinion shall include the following unless the party requesting the opinion requires a specific type of report or different data set:
- Identification of the subject property.Date prepared.
- Defined value or price. Limiting conditions, including statements of purpose(s) and intended user(s).
- Any present or contemplated interest, including the possibility of representing the seller/landlord or buyers/tenants.
- Basis for the opinion, including applicable market data; if the opinion is not an appraisal, a statement to that effect.
- Disclosure of whether and when a physical inspection of the property's exterior was conducted.
- Disclosure of whether and when a physical inspection of the property's interior was conducted.
- Disclosure of whether the REALTOR® has any conflicts of interest (Amended 1/14).
See a video from Dave Ramsey about WHY you should use a real estate agent: http://www.callsarahfirst.com/why-use-a-real-estate-agent
