Structuring The Offer
The Comparative Market Analysis (CMA) & Its Importance to Buyers
Prior to putting a home on the market or listing with a real estate agent, savvy home sellers obtain a comparative market analysis, also called a CMA by industry professionals. Sellers use the CMA to determine the price they are going to ask for their home.
So, why is this important for YOU, the home buyer?
Simply put, because sellers often (more often than not) price their homes at the very top of the fair market range or ABOVE it. It is essential that they buyer get their own CMA prepared by an unbiased agent (buyers’ agent) as opposed to relying on the CMA prepared by the listing agent. This unbiased CMA will serve as the basis for negotiating the price that you, the buyer, are willing to pay.
What is a Comparative Market Analysis?
Although CMA reports can vary from a one or two page list of comparable home sales to a multi-page comprehensive guide, the length and complexity of the report depends on the agent’s business practice and/or the particular property being considered. Some properties are easier to analyze than others. That said, comparative market analysis reports typically include the following:
- Active Listings – Active listings are those homes currently listed for sale. These matter only to the extent that they represent the competition available for buyers to consider. Active listings are not indicative of market value because sellers can ask whatever they want for their home whether that price realistically reflects current market conditions or not. The asking prices do not reflect fair market value until they have sold at the asking price. In a buyer’s market, most sell for less than the asking price (exceptions include some short sale properties, bank owned properties and realistic seller prices wherein the seller wants to save himself the time and hassle of negotiating).
- Pending Listings – Pending home sales are formerly “active” listings that are under contract and have no contingencies that must be cleared prior to closing. These have not yet closed so they are not yet considered as comparable sales. The actual selling price may very well be less (or more) than the price listed. That said, pending sales do indicate the direction that the market is moving whether up, down or stable.
- Sold Listings – This is where the rubber meets the road. Homes that have closed within the previous six months are the best indicator of current fair market value. These are your comparable sales. These are the sales an appraiser will use when appraising the home for the buyer’s lender, along with pending sales which may have closed by the time the subject home is sold. Take a good, unbiased look at these homes because they are where your market value is determined.
- Withdrawn / Expired – These are properties that were previously listed but taken off the market for any of a variety of reasons. The most typical reason during a buyer’s market is because the home was simply price too high. There is an axiom within the industry that says “sellers set the price but the market decides the value.” When a property is priced above what the market (willing and able buyers) determines then the listing usually expires or is withdrawn. Sometimes these homes are put back on the market with a different broker and/or at a lower price. The median prices of this group of listings is almost always significantly higher than the median prices of comparable sold properties. Of course, there are other reasons listings are withdrawn including sellers remorse, too many days on the market (agents sometimes withdraw listings for a period of time and put back on the market as a new listing in a feeble attempt to fool buyers), repair requests from previous buyers that need to be addressed prior to placing the property back on the market or the seller simply fired the agent because of a variety of reasons and has not yet hired a new agent.
Examination and Analysis of Comparable Sales
- Size – Given that other factors have already been weighed, a starting point for appraisers is in comparing homes based on square footage. This is determined by the amount of under-roof, heated, living space. Larger homes are valued less per square foot than smaller homes. Typically, variance in size for median price homes is in the 200 to 400 square foot range. For instance, if the subject home is 2000 square feet, the best comparable listings are between 1800 and 2200 square feet. That range may be expanded to 1600 to 2400 if sufficient data is unavailable in the former range.
- Age – Preferably, the age of comparable sold homes should be within just a few years of the subject home (5 years younger to 5 years older). However, some neighborhoods consists of a wide range of homes in terms of age and in those situations, factors other than age often weigh much heavier in determining value than the age of the homes.
- Features, amenities, upgrades and condition – This is an area in which most sellers (and novice agents) make costly mistakes in determining value. Sellers tend to think that their home features, amenities, upgrades and condition are far superior to other homes in the area and that the value for that superiority is great. The fact is that, even if the superiority is real, in a buyer’s market many (perhaps “most”) are of very little value to potential buyers. Also, more often than not, the comparable homes are more like the subject home than the seller realizes or is willing to acknowledge.
- Location – It’s no secret that real estate is valued heavily based on “location, location, location,” but in our experience few people really understand why this is so true. We addressed this topic in more detail in Buyer’s Step Four. Suffice it to say that “location” entails far more than just the neighborhood or region of town it is built.