The Total Newbie’s Introduction to a Real Estate Comparative Market Analysis
People need a Realtor that knows the market, can analyze data, and help them make an informed decision with one of their largest financial transactions. This is no time for guesswork. Take a strategic approach to determining listing or offer price.
A CMA is a Comparative Market Analysis – an evaluation of recently SOLD homes similar in size condition, age, and style (called comparables). This is used to determine the current fair market value when listing a home or making an offer. A solid CMA can make or break a deal, but keep in mind it’s not the same as an appraisal report.
Regardless of which side you’re working, the formula is the same. Here’s what to look out for to make sure your results are on point.
Why You Need This
Being a CMA wizard is good practice all around. For buyers, it means more accepted contracts and your client not getting ripped off. For sellers, it means pricing the listing accurately and actually getting the deal closed. It all starts with being able to crunch data properly and use that information to set correct expectations. Let’s get you one step closer to becoming a pricing powerhouse.
The Components of a CMA
Comparable properties that have sold recently are going to be what make up our numbers. Outside of that, look at what’s currently happening in the market and what you’re up against. The general rule of thumb is to have one smaller comparable, one slightly larger. Using too many smaller homes can increase the price per square foot which will throw off the pricing of the subject property.
The sold market is what determines a home’s value. You’ll need at least 3 comps (comparable properties) that have closed as recently as possible. Markets can shift quickly so you’ll want to use numbers that are as relevant and up to date as you can find. These sold properties (at least ones that were financed) have proven to be priced within a range supported by the current market.
These are the homes buyers are currently biting on. They haven’t closed yet so we’re not going to use them to determine pricing, but it is good to see what homes are getting offers.
Homes can be priced at whatever ridiculous number comes to the seller’s imagination. Make sure you have a bulletproof understanding of current market trends to know how stiff the competition really is. Maybe a home is priced too high and won’t appraise or is priced aggressively and is likely to move quickly.
When a property isn’t selling, it’s not uncommon for agents to withdraw the listing from the MLS and re-upload it as a new listing with an updated sales price. This gives it a second chance as a new listing to attract folks combing through the feed of new properties. Learn from other agents’ mistakes and pricing adjustments.
Ideally, we’ll find 3 homes that have sold in the last 3 months, all in the same neighborhood as the subject, all with comparable square footage and lot sizes. It’d be nice if life always lined up like that but there’s usually a little more to it than that. Below are the building blocks of your criteria to help you get started. Start with this and see where it gets you.
When the Homes Sold
- Start with properties sold in the last 3 months (the more recent the better)
- For more results, go back as far as 6 months.
Where They’re Located
- Narrow results to the subject’s subdivision. To get really specific, add the section number.
- If needed, widen the search by removing the subdivision info and plugging in the Keymap page and letter (ex: 326U).
- If you absolutely have to, draw a circle around the subject home. Start with a quarter mile and work your way out to a mile (at most). Don’t cross any major streets or freeways.
Size and Features
- Enter a square footage range +/- fifteen percent of the subject property.
- Example: The subject is 1500 sq. ft. (1,500 x .85 = 1,275, 1500 x 1.15 = 1,725) so you will look for properties between 1,275 and 1,725 sq. ft.
- Try to find homes with the same number of beds and baths.
- Even though living space is most important here, lot size is a key pricing factor as well.
Now that you have some results to work with, let’s check a few more details. Make sure you have more than you need because we’ll be shaving off the ones that will throw off the data. There are several things to take into consideration to get this just right.
- Check the disclosures and remove any that were foreclosures, short sales, or seller financed.
- Check the financing that occurred for sold properties. Looking at which homes were financed will give you a better idea of whether the subject property will appraise.
- Compare homes of the same style (ranch style home, contemporary, etc.)
- Use properties built within five to ten years of the subject.
- Older homes that have been remodeled should never be compared to new builds, only to other older homes. For new home data, request information from the builder it wasn’t uploaded to the MLS.
- Check listing archives to see any price adjustments and how quickly the properties went under contract.
By now you should have at least 3 sold comps to work with. Even though the properties are all as similar as possible, there are some adjustments to make to really even things out across the board. It’s a more advanced way of doing things so we won’t be covering it fully in this post but keep an eye out for certain features that may increase the value of a home.
- Carports vs. Driveways
- Bedroom count
- Properties sharing a fenceline with commercial development are usually seen as less desirable
Analysis ≠ Appraisal
Although there is a science to it, CMAs are not appraisals. This is a tool you have to help estimate a home’s market value, not determine it. Use comps that are as accurate as possible but be sure to set correct expectations. The client will trust you and your data if they see you’re methodical in the way you do your market analysis. Work your system and communicate why you chose the comps, how they compare, and what to expect based on current activity.