In Part I of this article we said the market value of a home, like anything in the market, is determined by what a buyer is willing to pay. Fortunately, in the real estate world there is a standard and proven method for determining “approximately” what that amount might be. This method is called a “Comparative Market Analysis”, also known as a CMA. Understanding the CMA is essential for sellers as they decide what price to list their home and for buyers, as they decide what price to offer.
So,what is a comparative market analysis? Let’s begin with the first word, “comparative”. As you have probably noticed, most neighborhoods or subdivisions are made of a group of homes that are similar in age, construction, style and size. You probably also noticed that each neighborhood is different and unique from another neighborhood and some are more desirable than others. The first step in determining market value is finding and comparing homes that are “similar” to your home if you are a seller, or similar to the home you are considering purchasing, if you are a buyer. From this point forward we will refer to your property as the subject property.
For example, if your subject property is a single story brick home with 1800 square feet, carpet in the living areas and bedrooms and tile floors in the kitchen, Formica counter tops in the kitchen, light fixtures and plumbing fixtures from the original construction in 1995 and the original standard builder fence that is now 14 years old, then you will need to find 3 or 4 homes that have recently sold in that same neighborhood that have those same amenities. You will not want to compare it to a home that has been updated with granite counter tops, all new fixtures, wood floors and a new board-on-board fence. If you do, you will find that the updated home sold for significantly more than the homes that are similar to your subject described above. This is a common mistake many sellers make. They see an updated home in their neighborhood sell for $200,000 and think they can sell their home for the same price when their home is not really “comparable”. In reality, if they looked at homes that have recently sold that are similar to their home with no updates or improvements; they would discover those homes “sold” in the $175,000-$180,000 range instead of the $200,000 range. So, it is very important to compare apples to apples when determining the market value of a property.
Now that you know how to properly compare similar properties, you are ready to look at the actual “market data”, the next word in comparative market analysis. You will need a real estate agent to assist you with this part, as well as, for preparing a Comparative Market Analysis, because they have access to the market data in the area of your subject property. Most communities have a multiple listing service (mls). This is the database system that contains all the properties currently listed for sale with a broker in an area. Many online sites, which post for sale properties, sometimes pull their data from the local mls. Once a property is sold and closed, the listing agent changes the status to sold and enters the sold price in the mls for that particular property. Only real estate agents have access to the mls, therefore, only they have access to the sold data. When a real estate agent prepares a CMA for you, it will usually be divided into four categories:
1. Similar properties that are currently listed for sale. Actives.
2. Similar properties that have recently sold. Solds.
3. Similar properties that have sales pending. Pending or Option Contract
4. Similar properties that have failed to sell. Expired/Withdrawn/Cancelled.
All four categories are important, but the most important category of all is the “Sold” properties. Comparing similar homes that have “sold” will give you an “average price per square foot” of what homes like your subject are selling for. The price per sq. ft. is determined by dividing the sales price by the square footage. For example, if a home was 2500 square feet and it sold for $200,000, then the price per square foot would be $200,000/2500 = $80 per sq.ft. If another similar home sold for $195,000 and was 2400 sq ft, the price per sq ft would be $81. You then take the price per square foot of 3 or 4 similar homes that sold and average them, to get an “average price per square foot.” Once you know the “average price sq/ft”, then multiply that number by the square footage of your subject. This is the approximate market value. One final note, you should only compare properties that are within 300 to 400 square feet of your subject, plus or minus.
Finally, the third word, “analysis.” A real estate agent analyzes the CMA and all the variables to determine what they think is a good estimate of value for the subject property. In their analysis, they consider many things like the number of days on the market, how many properties are currently listed, how many listings have expired and most of all, they make adjustments to the 3 or 4 sold properties chosen to make them like the subject. The analysis part requires the skill of an agent because they know how to make those standard adjustments for amenities, and in addition, they know the local real estate market. This is another good reason to always use a real estate agent when buying or selling a home.
This basic method of valuation is also used by appraisers as they determine the appraised value of a home. If a home does not appraise for the loan amount, then a lender will not lend you the money to purchase a home for more than its “market value”. One final important fact about a comparative market analysis is, it is an opinion of value; it is not an exact science. If you ask three different real estate agents to do a CMA on a subject property, you will get three different opinions. If they are good agents however, the opinions will usually be close in value.
I hope this explanation of market value has been helpful. The CMA gives you an idea of what buyers have been paying in the market, but as I said in Part I of this post, market value is always determined by what a buyer is willing to pay and what a seller is willing to sell for. If you can understand this key element in the valuation process, you will be a much more educated and savvy seller or buyer.