After successfully completing this topic, you will be able to explain how to prepare a comparative market analysis (CMA), comparing and contrasting with the sales comparison approach.
Most real estate licensees use a comparative market analysis to help show a seller the best offering price for a property. Buyers also make use of the CMA to help set the offering price when preparing an offer. There are many ways to prepare CMAs. Most MLS vendors have a CMA function that shows the properties that have been listed, sold, and expired. Most do not make adjustments. Some licensees give the seller a list of the recent neighborhood sales. Some licensees use a grid to make adjustments for the major differences in properties.
The sales associate must carefully review the features of the subject property before making a CMA because the owner may have made some significant improvements that could require adjustments if comparable properties did not have such improvements. Once the licensee has inspected the subject property, it’s time to find comparable properties that are currently listed, have sold recently, or the listing has expired. The easiest place to find that information is in the MLS.
The MLS is the most convenient way to find listing and sales information for listed properties. The MLS does not have information about properties that were sold by owner.
The property appraiser’s office is the best place to find homes sold by owner. All county appraisers have that information online, making the search very convenient. The licensee should be aware that the property data may be inaccurate.
The county clerk is another way to find property transfers, but the information may not be as useful as the first two methods.
Now that we have the data, we must select comparable properties from those properties that have sold, are now for sale, or those that expired.
The most important property characteristics for comparing properties are
• location – the property should be in the same neighborhood.
• style – a two-story house should not be used as a comparable sale to a ranch house.
• construction quality – major differences could eliminate a property from consideration.
• age – it would not be appropriate to compare a new home to a 30-year-old home.
• square feet of living area – big differences might eliminate a property from consideration. Living area that is below grade is worth less than area that is on grade.
• number of rooms.
• number of bedrooms.
The properties that have sold recently help to show what value buyers and sellers agree on. The adjusted value is the best estimate of what an appraisal will show.
The list of houses currently on the market show the competition to the seller’s property. The principle of substitution means that a buyer will usually select the property with the best price.
The listed prices of properties that did not sell show the market’s resistance to overpriced listings.
The best comparable sale will have the same characteristics as the subject property. Using that comparable, no adjustments are necessary. In real life, however, there are differences between properties and those differences may require adjustments.
Most MLS vendors make life much easier for licensees. The results of the CMA are printed in what can be an entire listing presentation to the sellers. Few adjustments are made, but the sales associate can select the sales that are most comparable.
AVMs are programs that automatically analyze various data points to produce an estimate of the current value of a home or property. The model uses linear and multiple regressions to estimate that property’s market value. Data analyzed can include the age of a home, market values, trends, historical data, property features and more.
The most well-known example of an AVM is Zillow, a web company that gives free Zestimates.
AVMs must be used with care because they can be misleading. It is not meant to replace more in-depth property valuations like in-home inspections or comparative market analyses.
|Example of adjusting for differences |
The subject property has a two-car garage; the comparable property has a one-car garage. The comparable property sold for $190,000. The market says that an extra garage is worth about $6,000. Remember “CIA-CBS;” If the comparable is inferior, add; If the comparable is bigger, subtract.
In this case, the comparable is inferior to the subject, so we add $6,000 to the subject’s $190,000 sale price. This means the market value of the subject property is $196,000, based on this comparable sale only. Normally we would need more than one sale to increase the reliability of the estimate.