Knowing the value of a home is the first step in selling a house. But this can be a difficult task. It’s not enough to have a rough estimate. An agent is a trained professional who understands local housing markets and makes a professional judgement as to what a home is worth. One important tool a real estate agent has at his or her disposal is a Comparative Market Analysis.
What is a Comparative Market Analysis?
A Comparative Market Analysis (CMA) is an evaluation of similar homes in an area–also known as comparables—to determine the value of a home. Real estate agents, buyers, and sellers perform a CMA to figure out a price range for a home, and then use it as a guide for putting the house on the market or for making an offer on a home.
The first step in doing a CMA is setting criteria. When creating a CMA you want to compare apples to apples. That’s an overused statement, but it’s important. If you do not compare similar homes, you might overestimate the value of your house. Worse, you might undervalue its worth.
Comparable Home Criteria
You should aim for at least three matching criteria, but the more the better. Standard criteria are:
- Location: The location of a home is more than its school district. Location includes things such as a view of the ocean compared to a view of a cell phone tower.
- Type: Compare your house to a house—not a condo. Compare your condo to a condo—not a house.
- Date of Sale: You’ll want your comparables to be recent. Try to stick within a three month period. If you have to, expand to six months. Remember, the further out you go the less useful the information.
- Size: Your comparable’s square footage should be within 15 % of your home. A house that is obviously much larger than your house will probably sell for more, all else equal. Conversely, a house that is much smaller will likely sell for less.
- Neighborhood & School District: If at all possible your comparable should be within the same neighborhood and school district. Some agents use use a five mile radius within a metro area and a 25 mile radius in rural areas. It’s actually a really good idea to drive by the home to get a first hand sense of the neighborhood.
- Number of Bedrooms & Baths: Try to compare homes with similar bedrooms and baths. There is some wiggle room here, but a home with three or even four more bedrooms than your house, isn’t a strong comparable.
- Age & Style: Try to compare homes with similar styles and from the same age group. As a guideline, the older your house is the larger range there is in comparables. A home that is 80 years old is likely similar to a home that is 90 years old.
- Condition of Home: If your house is a fixer-upper in need of a new roof and some yard work, it’s best not to compare it to the immaculately maintained house down the street.
- Lot Size and Usability: You don’t want to compare a significantly large lot to a modest lot.
Once you’ve set your list of criteria it’s time to begin searching.
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The more listings you can find the better, but there is a priority. Here are the types of listings you’ll look through:
1. Sold Listings: As the name suggests, this means the comparable has sold. This is a good indicator of the value of a similar house.
2. Pending Listings: This means a seller has received an offer and is awaiting final approval from a number of parties. This too, is a strong indicator of the value of a similar house.
For Comparison, but not for valuation:
3. Active Listings: Houses that have an “Active” listing are still being marketed for sale. Looking at these types of house will tell you what others think a similar house is worth. Another way to think of this is scoping out the competition.
4. Off-Market Listings: These houses, for a variety of reasons, are not being shown to potential buyers. It’s possible these homes are being partially renovated, or they might be in the process of being sold. It can be hard to tell.
5. Expired Listings: These are homes that were on the market for a specific amount of time. For whatever reason, they did not sell. The most likely culprit for why a home “expires” is because the asking price was too high.
These are the basics of a Comparative Market Analysis–if such a thing can be called basic. We’ve heard time and again that there is an artform to conducting an accurate CMA. And just like all art forms there are differing opinions as to what matters.
Everyone is doing it wrong! Except you.
One of the major points of contention in conducting a CMA is the use of distressed properties. We wish there was an easy answer. Unfortunately, there isn’t. Agents are divided on this issue.
Distressed properties are homes that for a number of reasons are being sold below fair market value. These include:
- Short Sales
The homes in these types of sales typically sell for less than they otherwise would. Because of this some agents argue they are not good comparables. In other words, a home that sells for less than it’s worth shouldn’t affect the value of another home.
“In themselves, these 3 subdivisions are not comparable to the general new-home or pre-owned home being bought or sold under “normal” conditions,” said Movoto Partner Agent Bob Faulkner. “The Buyer/Seller will be well served to make sure that…they are truly comparing apples to apples.”
But here is the point of contention: Whether we like it or not foreclosures, short sales, and REOs do happen—and they go on the market.
Movoto Partner Agent Enyinna Ezeife-Oshakuade put it this way, “In getting your CMA done be sure to include ALL comparable properties, including short sales and REO properties. Many people have the mistaken notion that those properties are not to be included in a CMA being done for an equity sale property. The fact is that all comparable properties need to be taken into consideration in order for you to generate an accurate CMA.”
If we had to choose a side, we’d go with including the Foreclosures, Short Sales, & REOs when performing a CMA. Our partner agent Dina Castiglia put it best when she said, “As far as Foreclosures; Short Sales & REOs are concerned they must be factored in if they are a true comparable (location, condition, type, size of both square footage & lot). If you are in an area where the market is still declining, this will help you make the right price choice for the property in question. Similarly if the area is on an upswing, or stable, the few foreclosures, short sales or REOs won’t be very negatively impactful but they will be accurate.”
Your Home is Trendy: Real Estate is Hyper Local
In doing research for this post, we asked Movoto Partner Agents about what goes into an accurate home price evaluation. Nearly all agreed a CMA was important in determining a price range for a piece of property.
However, many noted a CMA should be used in conjunction with knowledge of a local market. We talked about this briefly when we said a CMA should include recent home listings, opposed to sales that occurred even a year prior. What we mean is that a local market, especially the number of homes being sold in an area, will influence property value.
This is basic supply and demand.
If supply is low, the price of a house might be worth more because there are more people wanting homes. However, if there is more homes on the market than people wanting to buy, a house might lose value. One way of gauging an area is to know how long other houses were on the market before they sold. This is known as “Days on Market.”
“In a seller’s market like today in the SF Bay Area, pricing can be a little aggressive,” said Movoto Partner Agent Daniel Pizano. “Using Pending Sales can be one way to determine which way the market is headed towards in terms of prices. The condition of the market and the number of listings or competition is an important factor when choosing a price to list a property at.”
Ready to start valuing your home? Use our Comparative Home Report tool to generate your own!
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