Have you heard the real estate term “CMA” and wondered what it was? It’s an abbreviation for comparative market analysis.
Sellers and buyers should understand a comparative market analysis in real estate.
If you are selling your home, deciding how much to ask can be difficult.
Likewise, choosing how much to offer for the home is crucial when buying.
Whichever side of the real estate transaction you are on, getting this wrong could cost you thousands of dollars.
Having an appropriate listing price is crucial when selling your home. When buying, you want to know what would be considered a competitive offer.
A fair price in both circumstances is done by a popular evaluation method.
To find out a home’s value, use a real estate comparative market analysis (CMA). An analysis weighs multiple factors to give an accurate property valuation.
It also can be called a competitive market analysis.
From thirty-eight years of experience as a Massachusetts Realtor, there aren’t many things that are more vital than creating an accurate CMA. Buyers and sellers rely on agents to provide accurate home values. Without being precise, you become a liability for your clients. Real Estate agents should constantly work on fine-tuning this craft to be of value.
Let’s look at CMAs for real estate in more detail so you understand how they work better.
What is a CMA in Real Estate?
A CMA for real estate is a document by real estate professionals analyzing similar properties to the subject property to establish current market value.
Real Estate CMAs tell homeowners what their property is worth in the current market. They also help potential buyers determine what to offer.
A listing agent will provide a CMA for home sellers, while buyer’s agents complete them for potential buyers.
Realtors use comparable market analysis to give a price range to both buyers and sellers.
A comparative market analysis report differs from a formal appraisal conducted by a licensed appraiser. While both are used to establish fair market value, only a licensed appraiser can do a real estate appraisal.
The first step will be collecting appropriate data for the report. A local agent will use recent sales, pending, contingent, and current homes for sale to establish the right price for a property.
In some circumstances, an experienced agent may also look at properties that have expired or been withdrawn from the market.
They’ll look at the list price and determine any other causes of the home not selling.
A CMA will emphasize sold properties to establish current market value. Under-contract sales are valuable, too, because they give you a closer snapshot of the present. The least essential data point is an active listing.
The price on a current listing can change at a moment’s notice. You never want to hang your hat on what a home seller thinks their properties are worth.
What Does a Comparative Market Analysis (CMA) Look At?
Besides the property’s listing status, agents will look at vital characteristics in comparative market analyses.
While no two homes are the same, with many different factors contributing to what a home sells for, a CMA in real estate offers an insight into the fair market value.
The location, the home’s square footage, and the number of bedrooms and bathrooms are all important factors, but they are not the only ones considered.
The size of the lot, how old the house is, and the condition are also important considerations for the value. Even the school district in which the home is located could influence the home’s value.
Local and national market conditions will affect home prices, too. All of these things need to be considered to provide an accurate CMA.
A real estate appraiser will also analyze these items as part of a home appraisal.
One of The First Steps in Creating an Analysis is Visiting The Property
When a real estate agent is asked to complete a CMA, they usually pull the house’s history and find out who owns the property.
One of the first things agents will do after that to create a comparative market analysis is to visit the property. Excellent agents will make detailed notes of both the inside and outside of the home.
When creating a competitive market analysis, I like to walk through the house room by room and write anything pertinent to selling the house. The notes usually highlight anything that is either out of the ordinary or an outstanding feature.
Gathering this information makes it easier to create a report and helps create a property description narrative for marketing.
What Does The Report Contain?
When creating a comparative market analysis, it is likely to contain the following information:
- Either the seller’s or buyer’s name.
- The address of the subject property.
- The name of the real estate agent and company performing the analysis.
- A rough description of the property.
- There will typically be at least three comparable sales, possibly more if warranted.
- Pending sales may be included in the report.
- Current properties for sale may also be included to show recent competition.
- An evaluation that shows the differences between the subject property and “comps” used.
- An opinion of value with a suggested list price of the home and possible sale price.
Many real estate agents will use a comparative market analysis template.
How The CMA For a House is Created
Realtors search through recently sold properties like the homes they are trying to value. These properties need to be as close as possible to the house in search and have the same essential characteristics.
These similar homes are comparables or comps and help the agent assess the property’s value.
The idea behind this is that similar home sales information gives a good indication of the value of the home in question.
However, this might not consider features that could make one home more desirable than another.
You Need to Find Three Homes That Are “Comps”
When doing market analysis on a home, you look to find at least three properties that have sold within the last three months.
Failing that, homes sold in the last six months will be used. These properties must be similar to the house that is the subject property and should be located nearby.
An apples-to-apples comparison should always be used when possible. For example, other houses on the water should be used when evaluating a waterfront property.
The differences between these comps and the home will be examined and itemized. These differences can then be given a value to adjust the results accordingly.
Doing so gives a better understanding of the home’s worth when sold.
What Happens if Three Comparable Properties Can’t Be Found?
Finding three comparable properties in more rural areas could be more challenging. If the agent has difficulty finding enough sales data, they could use homes currently listed for sale or pending sales to fill in the gaps.
However, these data points should not be solely relied upon for establishing home value.
Sometimes, homes that failed to sell could be used to add to the analysis. If a home fails to sell, it could show what prices are too high in the current market.
If sales can’t be found for the past six months, old data can be adjusted to reflect how the local market has changed.
The agent might also consider using comps from a similar area without good sales data. A place with an equivalent level of crime, access to amenities, and quality of schools might be considered to give more comparable sold house prices.
While there is a greater degree of uncertainty here, the knowledge of an experienced agent should help ensure that a reasonable valuation is found.
How Does a Comparative Market Analysis Differ From an Appraisal?
While they use a similar method of finding the value of a home to an appraisal, it isn’t considered the same.
CMAs for real estate are compiled by agents using their knowledge of the local market.
On the other hand, an appraisal is conducted by a licensed appraiser and is considered impartial by the mortgage lender.
With a competitive market analysis, the value found could be influenced by the buyer’s or seller’s requirements.
For example, the sale of a home in a divorce. If the Realtor is friends with one of the parties, it’s possible some form of favoritism could influence the outcome of the comparative market analysis.
Despite this possible issue, creating an evaluation is very important. I use market knowledge to guide the assessment of the outcome.
Local Market Conditions Matter
Perhaps the most significant variable when trying to find the valuation of a home is the local market conditions.
It would be difficult to evaluate accurately without clearly understanding what the market is doing.
For these reasons, it is vital to understand whether the home is in a buyer’s or a seller’s market.
A seller’s market with rapidly increasing prices is less likely to have good comparables.
If you are considering buying a home where the prices have risen quickly, you could have issues with financing. Even though a seller might accept your offer, your lender will require an appraisal that could come in lower than you need.
In an environment where most houses have bidding wars, homebuyers often need to get creative and offer sellers appraisal gap coverage.
Understanding The Local Real Estate Market
Local market conditions are a pivotal aspect of conducting a market analysis. These conditions can include factors such as the current supply and demand, economic trends, and seasonal changes that might affect property values.
Real estate professionals can provide more accurate and tailored advice to their clients by analyzing these elements. It ensures buyers and sellers have realistic expectations about property values in their specific market.
How to Do a Comparative Market Analysis
While creating a CMA might seem complicated, it is divided into separate sections to simplify the analysis. This result should ensure that buyers and sellers get reliable information they can use.
As mentioned, the initial step for the agent is to find at least three properties in the same neighborhood that can be considered comparable. These homes must have been sold in the last six months, preferably the previous three months.
Once the properties are collected, the next step is looking over several essential factors in the multiple listing service to start the report.
What Things Will Become The Major Factors?
Location
The closer the comps are to the house in question, the better. But even if the homes are close to each other, there could be different considerations like the position in the development, proximity to a busy road, or if it’s a corner lot.
Is the lot over an acre of land, or is it sitting on a tiny lot? Is there privacy, or are you staring right into the neighbor’s windows? The lot size could have a significant bearing on the final sale price.
Agents will start to have an adjusted price when analyzing critical features within the homes.
Overall Size and Square Feet in Key Areas.
In general, a larger house is worth more money. However, how the square footage is distributed can be just as vital.
For example, if the kitchen is tiny compared to the home’s overall square footage, that could negatively influence the final price.
The same could be said for the family room or main bedroom, which are critical rooms in any home.
Real Estate agents often make mistakes with their CMA because they don’t differentiate a finished basement from the above-grade space.
The living area below grade cannot be assigned the same value no matter how nice the space is finished.
The price of a home will end up being wrong on many occasions when this is done.
The Number of Bedrooms
More bedrooms and bathrooms usually are going to equal a higher valuation.
The difference between selling a home with 2, 3, or 4 bedrooms could be enormous. Not having an expected number of bedrooms at a specific price will usually lead to a lower price.
Conversely, having an extra bedroom could push the home into a higher price point.
The Number of Bathrooms
Having more bathrooms is good and will always influence a home’s fair market value. For example, you will usually see a proper price adjustment by selling a home with only 1.5 baths vs. having 2.5.
There could be even further price adjustments if there isn’t an ensuite bath, and it’s expected for the price point.
The Condition and Age
The property’s condition is essential in the evaluation, particularly for older homes. Typically, homes that have been constructed more recently will receive higher valuations.
Older or historic homes renovated recently will be worth more than those that haven’t.
New homes generally have a price premium vs. a resale property.
Features and Amenities
If the home has unique or highly desirable features, it must be factored into the valuation. This must be considered if the house has a large swimming pool, a grand fireplace, a finished basement, or anything else that sets it apart.
Even if these feature types exist, it doesn’t always mean the home will be worth more. It depends on the local area market and whether these features add more value.
Recent Improvements
Does the evaluated property have a new heating system and roof? Was the kitchen recently remodeled? These improvements must be considered to come up with a fair price.
Some homes may have similar features, while others could have substantially better upgrades. Improvements are often a fundamental difference in real estate transactions.
Both home sellers and potential buyers need to be aware of this fact.
Apples to Apples Are Essential
The property type should always be the same when establishing the market value of a home.
For example, you should not compare a stick-built home to a modular home or a foreclosure home to a traditional one.
Terms of Sale Matter
The comparable sales might include seller concessions or contingencies, and the type of financing could also be reflected in the sales price.
If, for example, the seller agreed to pay some of the buyer’s closing costs, this must be deducted from the purchase price.
When evaluating a comparable property, you have to take a closer look at these things. It’s all part of doing a comprehensive CMA.Click To TweetAn Example of a CMA
To give you a better understanding of CMAs, let’s take a look at an example.
A buyer is looking to purchase a home on the market for $500,000, but they’re hoping to offer less. They ask their buyer’s agent to analyze local home values to help them decide how much to offer.
Proving a comparative market analysis is one of the services a buyer’s agent provides.
The agent will look for comps based on the house’s location, the number of bedrooms and bathrooms, the square footage, the condition, and more.
To begin the analysis, details of the three best comparable homes sold in the last six months can be provided.
Making Comparable Adjustments
It is doubtful that these homes will be the same as those for sale, so the differences must be listed. The estimated value of these differences will then be found to adjust the evaluations.
The sales price of each comp is adjusted to get a better idea of what the home would have sold for if it was even more similar to the subject property.
When the prices of the comps have been adjusted, this will give a range for how much the buyer should offer on the home.
The agent will then use a reconciliation process to determine the best offer price. They will look at the three comps, and the one with the most adjustments will be assigned the lowest weight.
The comp with the minor differences is given the highest weight, and these figures will then be multiplied by their weighted value.
These results are added together to give the ideal offer amount. The buyer’s offer can then be sent to the listing agent with the analysis to show why this offer is exemplary.
Some agents use an average price or price per square foot to determine market value. This is a mistake and often leads to an inaccurate CMA.
An analysis with improper use of data often leads to overpricing and extended days on the market.
What is a Free Competitive Market Analysis?
Many home sellers will ask how much a comparative market analysis costs. The answer is nothing—zero, Zilch, nada.
A free CMA in real estate is standard.
Real Estate agents rarely ever charge for doing a CMA. Real estate agents often offer free home values as part of their business plan.
The goal of offering a free CMA is to build rapport with clients and potentially do business with them at some point.
Home sellers often look to find out their property’s fair market value.
A Realtor has one foot in the door with a potential home seller by offering a free evaluation. It’s a tool for an agent to capture business.
When Are CMAs For Real Estate Conducted?
The two most common reasons a comparative market analysis is done are when a seller wishes to sell, or a buyer wishes to purchase.
It could be investors looking to understand the local market or a traditional home buyer looking to make an offer.
Occasionally, a Realtor will be asked to analyze an estate’s value.
It’s not unusual for a family member to know the property’s value at the time of death for tax purposes. When the seller passes, an agent can analyze the value of a specific property.
Ignore What Zillow Says a House Is Worth
A word to the wise – a Zillow home value is rarely what your home is worth. To get the accurate value of any home, you should speak with a qualified real estate agent or appraiser.
Zillow home value estimates are all over the board. I’ve seen Zillow’s home values off by over $100,000! While looking at Zillow can be a starting point, never look at the number to price your home for sale or make an offer.
Zillow has never entered your home. Don’t expect an algorithm to compute something as complex as home values.
Can a Buyer or Seller Do Their Own Analysis of Value?
Can a home buyer or seller do an analysis? Sure, it is possible but not recommended. Pricing a home is an art and a skill.
A buyer or seller will unlikely have the knowledge and expertise to find appropriate comparable sales data.
Choosing the right comps is imperative to arrive at the correct home value. If you insist on doing your comps, there are a few sites to use that can help.
Websites to Gather Information For a Market Analysis
When you don’t have access to the multiple listing service (MLS) like a Realtor does, the following sites can help pull together an analysis.
Realtor.com—Realtor.com is one of the largest databases of properties. It has a direct connection to the local MLS.
Zillow.com – Zillow also has an excellent database for searching properties. However, some of their information can be outdated.
Trulia.com – Trulia will also allow you to find comps to help determine the value of your home.
Get a Property Evaluation Done in Massachusetts
Are you thinking of selling your home? Do you live in the Metrowest, Massachusetts area? Don’t hesitate to contact me if you would like a CMA for real estate performed on your property.
I would be happy to provide you with a comprehensive property analysis.
Hopefully, you now have a much better understanding of how a CMA in real estate works.
Exploring Different Valuation Methods
While a comparative market analysis is a standard tool for estimating property values, it’s essential also to consider other valuation methods. These can include formal appraisals, which provide a more detailed and legally binding valuation, and automated valuation models (AVMs), which use algorithmic calculations to estimate property values quickly.
Discussing these methods can help clients understand the different approaches to property valuation and why a CMA might be preferred in specific scenarios.
Conclusion
If you want to make an offer on a property, the CMA could prove vital in finding the best price to approach the seller. They can also help get a better deal on the property during negotiations.
The local market knowledge of your agent will produce a more accurate result. Access to the complete sales data and an understanding of what the local market is doing should improve valuations.
If you are selling a home, an accurate value analysis is imperative to price your house accurately.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on a comparative market analysis. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.
