Comparative market analysis is a helpful tool for both buyers and sellers in the real estate market. Formal appraisals are always the best way to determine a formal value for a home, and are usually necessary before closing on a bank loan in most real estate transactions. In reality, legally an appraisal is only valid for 1 day, therefore in order to avoid repetitive appraisals during the arduous long process of listing a home to closing, the CMA can be very helpful for real estate agents to estimate a fair market value for both buyers and sellers. This is an essential step for buyers and seller to complete before starting the process of negotiating an offer to purchase.
What is a Comparative Market Analysis?
Real estate agents are trained to do a CMA, but this is not the same as a formal appraisal, which requires additional certification and training to provide. Having disclosed this, CMA's are a way to create a likely narrow range of fair market value to help sellers determine a starting point for negotiating when listing a home at a set list price. In addition, a buyer's agent working with a potential buyer, can use a CMA to compare the property to other similar properties in the same neighborhood, or with similar features in an equal area.
A CMA is initially made from a collection of listed properties (either recently sold properties or currently on the market and active), that includes details such as price, lot size, square footage, number of bedrooms, number of bathrooms, architectural features, age of the home, number of car garage, and even show info such as days on market and percentage of asking price to final closing price. This will aid a seller to create a realistic expectation, and a buyer to confidently bid without overpaying on a home.
Once a list is produced, usually including homes sold within a narrow period of time (preferably less than 6-12 months), then minor adjustments between the property being evaluated and the comparative property can be made to the comparable property's price. (For instance, if the subject property has one extra bathroom than the previously sold comparable up the street), then the value of the comparable would need to be raised to create an expected price range). If the home of interest has less square footage than the comparable, then a value figure attached to that difference would be subtracted from the comparable. (Remember- SBA and CBS "subject better add" and "comparable better subtract" to understand this concept). Usually this process is repeated with at least 3-6 comparable properties until a range is made of expected value for the home being considered.
Why Should A Home Owner Depend On A Compatative Market Analysis Before Selling?
In addition to location, the price that home is set for the market as well as the advertising are top reasons why a property moves quickly. If a home is over-priced (in an effort to recoup losses by the seller in the down-turned market or to cover money put into additions/upgrades), buyers viewing that home will be comparing it to higher valued homes and it will not represent well. It will also be likely to take longer to sell, ultimately putting the seller at a disadvantage.
The CMA allows the listing agent to suggest a listing price to the seller based on facts, not just experience, as a way to create a realistic picture. It could even mean identifying the potential risk of a short-sale by combining the results with a simple calculation called net to seller to determine the minimum needed final sales price to cover a sellers needs, or necessitating other creative solutions for a buyer such as turning a home into a rental property until the market turns around and values climb.
Why Should A Home Buyer Use A Comparative Market Analysis?
A buyer can use the CMA to realistically create a fair offer price based on an educated level of understanding of the property's features compared to other recent transactions. It may assist the buyer's agent in determining as well how quickly and hot the market in that neighborhood is moving, and how competitive the offer needs to be. If sales are slow, and the closing prices are much lower than the listed price, the buyer often be more aggressive in bargaining and offer lower or ask for more benefits such as additional closing costs paid by the seller. It also gives the buyer confidence that if the offer is accepted, that they received a good value for their purchase.
Other Ways To Determine Fair Market Value Of A Piece Of Real Estate Property
The comparative market analysis is a powerful and useful technique for real estate brokers to create a probably range (usually within $8,000 or so in price) for both the buyer and seller to aid real estate transactions. Market value can change rapidly, and this technique can assist with those changes between more comprehensive appraisals that are an investment in cost but much more complete. A CMA does NOT replace the value of an appraisal, survey, or inspection, but is a guideline for screening homes to purchase and pricing a home to sell. It does not involve a walk-through valuation process, so substantial variations with true market value could still occur and could cause a property to be off the market estimates if substantial hidden faults or damage is present. If a property has special qualities or is a special type of real estate transaction (such as a specialty use property/historic property, etc) that would not have comparable properties, other valuation methods can be used (i.e. income approach for rental properties or cost approach to replace unique properties).
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