Comparative Market Analysis

Comparative Market Analysis

  • Intended Learning Outcomes
  • Distinguish between a formal appraisal and a comparative market analysis (CMA)
  • Explain the three major sections of a typical CMA report form
  • Know what information is necessary to prepare a CMA
  • Suggest the best sources to find the information necessary to prepare a CMA
  • Explain the major elements of comparison between the comparable property and the subject property
  • Correctly calculate the square footage of a building
  • Prepare a CMA which would allow a seller or buyer to understand values in the neighborhood

    The Comparative Market Analysis (CMA)

    Defined

The Comparative Market Analysis is an informal method of estimating a property’s value by comparing that property (subject property) to other, similar properties (comps) that have sold or are currently for sale or whose listings have expired. After all the research and data have been accumulated and reviewed, the licensee can establish a range of values for the subject property and suggest an initial listing price. Due to the CMA’s less complex nature, it is not considered to be an appraisal and will not be relied upon by lending institutions. CMA’s are exempt from the required rules of appraisals known as the Uniform Standards of Professional Appraisal Practice (USPAP).

The purpose of a CMA – Comparative Market Analysis is to:

Gain knowledge about the property and the area for the sales associate;
Be accurate in obtaining data with which to compare the subject price;
Get information to share with the seller in order to obtain a list price; or
Get information to share with a buyer in order to obtain an offer price.

Differences between a CMA and an appraisal.
Although the CMA and the appraisal both review prior sales of similar properties, there are many differences:

The appraisal will only consider similar properties (“comps”) that have actually sold as reliable data. The person performing the CMA will consider comps that have sold, comps currently for sale (current competition), and expired listings (because expired listings may be evidence that a listing price was too high).
Appraisers follow formal rules established under the USPAP. CMA’s do not have a standardized set of rules and are considered to be an informal method of estimating value.
An appraisal will establish a specific dollar amount estimate of value while the CMA will establish an estimated “range” of values” for the subject property.
A person must be a state-licensed or certified appraiser to perform an appraisal. No formal license is required to perform a CMA.
The CMA only uses the sales comparison approach to valuation while the appraisal includes the sales comparison approach, the cost depreciation approach, and the income capitalization approach (if applicable).

Preparation of a Comparative Market Analysis
The CMA form—Florida Association of Realtors

The Florida Association of REALTORSÒ suggests using its standardized form when a REALTORÒ performs a CMA. The form is divided into separate sections for the subject’s features and the comp’s features, and a section for the necessary mathematical adjustments.

The form should be easy to use and consistent in the use of comparables. For example, it should have the basic categories plus the subject property. It should have a heading for the subject property; for competing properties; for expired listings and sold properties, with spaces to fill in the information. A column should also be included for notes, as well as a column for adjustments for such things as fireplaces, screened-in porches, etc., which one home may have and another may not.

Licensees today are not required to do CMA’s by hand. There are a number of software programs available that are used extensively for CMA’s. New licensees should check with their employers or the local association of REALTORS® for more information.

A licensee can charge a fee for performing a CMA, but it is usually done as a free courtesy.

Categories of comparables
Three distinct categories of comparables should be used:

Currently on the market;
Sold during the last 12 months;
Expired or removed during the last 12 months.

Currently on the Market Comparables (comps)
This listing of currently available homes for sale at this time is, in essence, the competition for the subject house. This list is usually obtained from the MLS® computers, to which the broker belongs. The list of properties, which is updated every morning with new listings and sold listings, is an invaluable source of information for the listing agent.

All currently available listings for sale will have a list price, which is the price that the property is marketed for sale. Competent sales associates will have read the statistics in the computer printouts from the MLS® to ascertain what percentage of the list price properties in that area, in terms of list price and sold price, and price a property accordingly. For example, if the property in Mandarin, Florida, sells for 97% of list price on average, the sales associate will know to figure that the list price is 3% higher than the projected sale price.

What’s the sale price on the competitive house down the block?
How many bedrooms does it have?
How many baths does it have?
Does it have a pool, family room or three-car garage?

Sold during the last 12 Months
This is the maximum time limit for comps allowed by Freddie Mac (financing); so it is advisable not to have comps older than that when pricing property, even though the appraiser is the one doing the actual appraisal. The more comps at the shortest time are the best to use, with a minimum of three comps being used.

The comps in both cases listed above must be similar in size, age and design (ranch, two-story, etc.) to be comparable and if at all possible, the same subdivision and builder. This makes the comps more closely resemble the subject property and makes it easier for a seller to understand. [Which cases listed above?]

Also, the number of days a property is on the market is a major category with the sold comps. If a property is distressed, it may linger for long periods of time on the market. Conversely, a property may sell too quickly if it is undervalued. Sometimes a home has so much curb appeal or is in such a great location it will also sell quickly; so the experienced sales associate will have to determine which of the above is true.

How many days on the market?
What was the sale price?
How many bedrooms did it have?
How many bathrooms?
Was it the same age as the subject house?

Expired or Withdrawn in last 12 Months
This information is the hardest to find since these properties are not listed in the public record at the courthouse, but the MLS® has this information in its computers. Every morning, listings that have expired or withdrawn are shown in the hot sheet printout of the MLS® computer.

It is sometimes hard to find out the reason for the expiration or withdrawal. The property could have been listed by a sales associate who did not do his/her homework and priced the property too high. The seller might have been unreasonable and priced the property too high. Sometimes people selling their property think that an interested buyer “could always make an offer,” when, in fact, most buyers simply won’t bother.

Sometimes sellers get tired and discouraged and refuse to renew a listing or they were just fishing to get the offer they wanted to begin with, in spite of the sales associate and his CMA.

The most complete information that can be found, even if it means calling the expired listing to ask about it, will yield information to the sales associate for the subject house.

Why didn’t it sell?
Was it priced too high?
Was it a distressed home?
What was the problem?

Information needed for comparative market analysis
In preparation for performing a CMA, the licensee should gather the following appropriate information concerning the subject property:

1. Names and address of the owners

2. Legal description

3. Lot dimensions

4. Number and types of rooms and overall square footage

5. Date and type of construction

6. Neighborhood info (schools, recreational facilities, etc.)

7. Current property taxes

8. Amount of existing mortgages

9. Average utility bills

10. Appliances included in the purchase price

11. Current zoning (important for vacant lots)

12. Personal property and fixtures included in the purchase price

13. Environmental hazards (if any)

Obtaining comparables

There are a number of different areas and methods for acquiring comp data and information. Probably the best source is the Multiple Listing Service (MLS) where the licensee can perform computerized research on current listings, sold properties, and expired listings. Licensees are encouraged to contact other licensees involved in those comp transactions to confirm the information and discover any other conditions of sale that might not be stated in the MLS (e.g. non-arm’s length transaction).

Other sources for comp data include public records and tax records. These sources can provide sales data of properties not listed in the MLS.

Common elements of comparison
There is an old saying: “Not all comps are created equal.” Just because a comp sold for a price, that amount is not an absolute and must be adjusted (in dollar terms) in accordance with how the comp differs with the subject property. Those factors which have to be analyzed, assigned a dollar value, and used for adjusting the comp’s selling price include:

The following information is needed to complete a CMA:

Location of the subject property and comparable properties;
Size and shape of a lot;
Quality of curb appeal;
Construction quality;
Style;
Age;
Square feet of gross living space;
Number of rooms;
Number of bedrooms;
Kitchen size;
Condition of the interior;
Garage and number of stalls;
Condition of the exterior;
Other improvements.

Location

“Location, location, location” is the first comp needed. Are the comps located in the same area as the subject house, the same school district, the same subdivision? It is important to get the comps as close as possible to the subject house. Even within a subdivision, because of external obsolescence, a home on the exterior of the subdivision is less valuable than one located in the center.

Size and shape of the lot

Are all the comps the same or are some lots bigger or laid out better? A lot can make a big difference to a buyer: Some want an interior lot with other homes backing up to it and others want a cul-de-sac home so that they are not on a busy street.

Curb appeal

Does the subject house have as good a curb appeal as the comps? Does it need to have major overhaul work done on the paint, the landscaping, and the sidewalks? The buyer will automatically deduct from a home that needs work.

Style

Is the subject home a ranch, two-story, or split level? Use the same type of home for comparison if at all possible.

Age

Even within subdivisions, homes are different ages. Some homes age gracefully; others do not. All homes have water heaters that wear out–so the buyer will consider this in making a purchase unless the interior of the home has been updated.

Square Feet of Gross Living Space

Another way of expressing this is the amount of finished square feet actually used in daily living. The screened-in porch is not considered to be part of this, even if it is used daily, nor is the garage. This counts only rooms that are grade level or above: Basements are not considered in this figure. Actual square footage is measured on the outside of the building rather than the inside.

Number of rooms

The total number of rooms is important to compare, but be careful: Some sales associates count rooms as separate when they are not really separate or, in some cases, they are not rooms at all. A long living room can be considered by some as one room or by others as two rooms (living room and dining room).

Number of bedrooms

These should be rooms with closets. If a comp has a strange number of bedrooms for the size of house, look carefully at the room sizes.

Kitchen size

How big is the kitchen? What appliances does it have? Most of these items are listed on the computer printouts. Once in a while, a kitchen does not have a dishwasher, which does not make that home as valuable to a buyer as a kitchen which has one.

Condition of the interior

This is important to know, but it is not always possible to get this information. If a particular property is especially important for the comps, it will be a good idea for the sales associate to call the listing agent, even on an expired listing, to get the information.

Garage and number of stalls

Everyone wants a garage to keep a car in (as well as a boat, lawnmower, etc.). Three- car garages are more valuable than two-car garages. A garage is more valuable than a carport, and a house with no garage or carport is the less valued of all.

Condition of the exterior

Does it need to paint? Do the comps need to paint? Does the yard need to be landscaped? Does the house have a welcoming look? These things can be noted in the CMA in the condition section.

Other improvements

Some improvements to a home are important to buyers; others are not. A new remodeled kitchen is a good way to add value to an older home, as is adding a home office with computer wiring. Adding a tandem garage (one car behind another) is not usually a buyer’s choice.

Fresh paint on the front door helps improve the condition of the exterior!

Construction Quality

Sometimes a lender, especially FHA, will have minimum property guidelines that must be met and noted on the appraisal if a deficiency exists. The appraiser does not have the luxury of looking in walls but must note items that need repair and display inferior quality. If there are observable code or health and safety violations the appraiser will note.

Adjusting for differences

Once the proper comparables have been gathered, the licensee then adjusts the comparables to be as similar to the SUBJECT PROPERTY as possible. Only the comparables are adjusted, not the subject property being valued. If the comparable is better than the subject, the appraiser must subtract the value difference from the comparable to make it like the subject. If the comparable is inferior, the value must be added to the comparable to make it like the subject. Remember CBS and the CIA: If the comp is better to subtract – If the comp is inferior add.

In the adjustment process, there is a specific sequence that must be followed. Transactional characteristics, such as arm’s length transaction issues or rate of appreciation, are adjusted first. After that point, the adjustment of property characteristics follows, such as a number of rooms or other improvements.

Reconciliation

The act of adding or subtracting adjustments to the comparables is called reconciliation. This makes the properties similar, even though in real life an already sold price of a comparable cannot be changed. The idea is to make the properties similar to determine what the range of market value is for the subject property.

To obtain the numbers needed for reconciliation, one of the best ways is to have a copy of the appraiser’s Marshall and Swift book, “Residential Cost Improvements,” in the brokerage office. The book is fairly expensive, but it is very accurate for making adjustments and is the book most often used by appraisers. This book will tell the sales associate what a garage costs, or a fireplace or an added bathroom. Other sources for this information are home improvement centers or builders in the area.

When the sales associate is finished with the reconciliation, he or she can then see a range of prices that the subject is likely to sell for in the open market.

If house A sold for $120,000 ($110,000 after adjustments)

If house B sold for $118,000 ($113,000 after adjustments)

If house C sold for $115,000 ($112,000 after adjustments)

The range of the subject house would be $110,000-$113,000.

The use of the modern computer has helped a great deal with CMAs. Being a member of the MLS® makes it possible for sales associates to get most of the information needed. Some items, such as the condition of the property, are best seen firsthand; but sometimes they can be seen in a virtual tour of the property.

It is the responsibility of the sales associate to interpret the data to the buyer or the seller in a comprehensive fashion. Most sellers are surprised to find out what the true selling price of the neighbor’s house really is, since many times the neighbor inflates the price when discussing it with others. Explaining the days on the market to a seller will make it easier to explain why the house did not sell in the first ten minutes after the sign went up and why a renewal of the listing contract is important for continuity.

Since all sold properties are not listed in the MLS®, computer information can also be obtained from local government agencies on their websites. If the sold property was listed in the MLS® many of the MLS® systems are wired into the local taxing agencies; so it is possible to get tax information directly from the city or county where the property is located. This tax information will serve not only for information on taxes but will also show how one property compares to another in terms of value.

A word about privacy would be in order for brokers. When showing the list of comps to sellers or buyers, it is appropriate to hide the names of the sellers and part of the address to protect the privacy of the previous sellers or owners whose property did not sell. The names of the streets and partial street addresses should be enough to make it clear to the seller or buyer what the price of housing was for comparison. Brokers must make a decision about privacy issues and place a policy in the policy manual regarding this issue.

By using the computer system of the MLS®, a sales associate can get most of the information needed.

Case Study of a Comparative Market Analysis
Calculate the square footage of a structure

To calculate the square footage of a structure, the appraiser will typically first measure the exterior dimensions of a structure and multiply the width by the length. However, the square footage of the garage and an exterior porch or lanai areas are then subtracted from the overall square footage to determine the GROSS LIVING AREA, sometimes referred to as the heated and cooled square footage.

Example: What is the gross living area of a structure that measures 55′ x 84′ and includes a garage that measures 25′ x 15′?
Step One: 55’ x 84’ = 4,620 sq. ft. square footage under roof

Step Two: minus the Garage (25’ x 15’) = 375 sq. ft.

Step Three: 4,620 – 375 – 240 = 4,245 sq. ft

Summary

Pricing property to sell cannot be an exact science since there are so many variables, just as there are variable buyers and sellers. The qualified sales associate will use the CMA (Comparative Market Analysis) to help do the job. By having a CMA, sellers who are going to list property or buyers who are going to buy property get a fair representation of other activities of homes in the area.

A CMA varies from an appraisal in several ways:

A CMA is to give a range of values, where an appraisal states an opinion of value.
A CMA is not used for lending or insurance purposes where an appraisal is.
An appraiser must follow specific guidelines, but a sales associate follows the direction of his or her broker.
An appraiser uses three approaches to value when possible; a CMA uses the market data (summation) approach.
When doing a CMA, use an easy, uncomplicated form using the three categories of comparables:

Currently on the market;
Sold during the last 12 months;
Expired or removed during the last 12 months.
Data collected about the comps should include:

Location of subject property and comparable properties;
Size and shape of a lot;
Quality of curb appeal;
Construction quality;
Style;
Age;
Square feet of gross living space;
Number of rooms;
Number of bedrooms;
Kitchen size;
Condition of interior;
Garage and number of stalls;
Condition of exterior;
Other improvements.
Once the comparables are gathered with their specific information, the sales associate will adjust for differences. Only the comparables can be adjusted: Add if the subject house is better. Subtract if the subject house is worse.

Reconciling is the act of adding or subtracting the adjustments to make the comparables similar to the subject house. The computer is useful for finding this material. Once the sales associate has completed the reconciliation, there should be a clearly indicated range of sale prices to be adjusted with percent of sale price to list price. Once this is obtained, the sales associate can help the seller determine the list price, based on the range of sales the sales associate has prepared.

Here’s how it works:

Find the probable range of sales price: $154,000 – $162,000.
Decide on a market price with the seller.
Determine a list price that is 3-5% higher (depending on the ratio of list price to sale price). For example, if the MLS® comps tell the broker that a property sells at 97% of list price, the broker will know to add 3% to the projected sale price to get a list price.
The math works like this. Suppose the sale price is projected to be $160,000.

By multiplying $160,000 by 103%, it can be determined that the list price should be $164,800.

Vocabulary List: comparative market analysis, curb appeal, gross living area, opinion of value

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