Buying a new home requires a lot of research and a good deal of patience. While your focus may be on finding a house you can envision living in for years, making the right offer is just as important. It can also be challenging. If you make an offer that the seller considers too low, they may discard it and choose another. If the offer is too high, you could overpay for the home.
Lenders will only provide a loan up to the amount that the home is worth. If their property appraisal is $30,000 lower than your offer, you could be tasked with paying the difference. Your real estate agent can help you avoid this hassle by performing a comparative market analysis (CMA).
Understanding Comparative Market Analysis
A comparative market analysis (CMA) is a process that involves estimating the value of a home based on recently sold properties in the vicinity. Real estate agents can find similar properties that have sold within the past three months, giving you a better idea of your offer.
A comparative market analysis can also be advantageous if you sell your home. Your agent can use the data they collect to recommend the ideal listing price for your home. If a seller prices their home too high, it won’t sell. When the price is set too low, the seller may not make a profit after the sale goes through. The primary components of a CMA include everything from age and size to condition and construction.
Components of a CMA
A CMA is made up of numerous parts that are combined to settle on an accurate price. Since the market fluctuates regularly, real estate agents only look at properties sold in the past three to six months. The final analysis will include three or more properties like the main one. Agents can also choose properties that are still listed on the market. The main components of a CMA include the following:
- Location
- Square footage
- Lot size
- Condition and age of the property
- Total number of bathrooms and bedrooms
- Date of sale
- Extra amenities
- Terms of sale
Location is a significant factor. The most relevant comps involve homes in the same neighborhood. There are times, however, when there aren’t enough recent sales of similar properties in the same area. In this scenario, the real estate agent will find a similar location regarding crime rates, local schools, and noise levels.
The size of the home usually determines what its value is. Larger homes often have higher values, meaning a comparable property must have a similar square footage. The same is true of the lot size.
The condition and age of the property are considered as well. If the home you’re interested in has recently been renovated, these upgrades might account for a higher price. Homes can only be comparable if they have also received recent renovations.
The amenities considered when searching for comparable properties include everything from garages and patios to swimming pools and fireplaces. However, remember that not every amenity adds value to a home.
When looking at recently sold properties, your agent will also consider the terms of the sale. For example, a seller might agree to a buyer’s contingencies if they offer higher. The higher price may not accurately reflect the home’s value, which your real estate agent should consider.
How Realtors Build CMAs
Building a CMA involves everything from gathering comparable properties to listing the differences between each one. Your real estate agent’s expertise is invaluable in ensuring this entire process is handled with care. The first step in creating a CMA involves evaluating the neighborhood surrounding the main property. Your agent should consider HOA rules, school proximity, curb appeal, and community amenities.
Before searching for comps, your agent will gather information about the property you’re currently interested in. They’ll review the listing to identify the home’s age, size, construction, layout, condition, landscaping, upgrades, and finishes.
Once your agent has gathered this information, they should have everything they need to obtain accurate comps. Most agents select three to five homes that have been sold recently. The best comps involve homes within one mile of the leading property. If the home is located in a unique spot, the comps should be as well. For example, a house with waterfront views should only be compared to other properties with the same feature.
After gathering comps, your agent will adjust for the differences between the main home and all comparable properties. A price may be assigned to each difference to obtain a more precise estimate of the home’s value.
Once all adjustments have been made, your agent will divide the price of each comparable property by its square footage, which allows them to identify the sale price per square foot. The price of each comp is added together before being divided by the number of properties. With this approach, your agent can obtain the average cost of the comparable properties.
Challenges in Creating a CMA
Since many moving parts make up a CMA, real estate agents must overcome numerous challenges to create one successfully. Along with data analysis, your agent must also use local insights and market intuition to arrive at an accurate price. Likely, the most challenging aspect of making a CMA is dealing with ever-changing market conditions. The real estate market never remains still for too long. Numerous external factors, including interest rates and economic conditions, impact home values.
It’s also common for agents to receive incomplete data when performing a CMA. Only some properties are listed and sold through the MLS, which makes an accurate comparison difficult. Real estate agents may need helprm in-depth comparisons with private sales and FSBO properties.
Emotional variables could also play a role in the value of a property. If a seller has an emotional connection to their home, it isn’t easy to factor this variable into the CMA. A home’s characteristics can also be highly varied, which may pose a challenge to even the most experienced agents. Even if a house is comparable based on age and size, it may have distinct features that change the value considerably.
CMA vs. Appraisal
Real estate professionals perform appraisals and CMAs. However, licensed appraisers go further by using housing market indicators and industry knowledge to determine a home’s actual value. Even though a realtor can prepare a CMA, they can’t appraise a home. An appraiser must be someone who doesn’t have a financial stake in the sale of the property.
The preparation of a CMA is part of the cost that comes with hiring a realtor. The seller usually covers this cost. Buyers will need to pay for an appraisal themselves. This process is done during the underwriting process. While a CMA often occurs early in the buying or selling process, appraisals usually happen after an offer is officially accepted.
Benefits of Using a CMA
For many reasons, using a CMA when buying or selling a home would be best. For example, the analysis can help you establish a budget before searching for a home to buy. Your agent can find comps that match your desired lot size, amenities, and floorplan. If you need more moneyford your ideal home, the CMA should help you change your search criteria to identify properties within your budget.
The CMA might also assist you during negotiations. If you make an offer that’s lower than the asking price, the seller may enter negotiations with you. You can use the comps to show them that the home isn’t worth the asking price.
For example, let’s say you want the home you’re buying to have a relatively new roof that is at most three years old. If the home you offer has a 15-year-old roof, you could negotiate with the seller to reduce the price.
Can You Prepare a CMA Yourself?
While creating a CMA yourself is possible, it isn’t advisable. Realtors have the industry knowledge and expertise to prepare a highly accurate CMA. These professionals can use their networks to obtain information about a property not displayed in public records.
Realtors also have access to MLS services that are only available to professionals with a real estate license. The MLS includes current information about properties. Your realtor can use their knowledge of the industry and the state of the market to determine what the home you’re interested in should be priced at.
Tips for Crafting an Effective CMA
Whether you’re a buyer wanting to create their own CMA or a real estate agent looking to make one for a client, it’s essential to develop an accurate CMA. Stay up-to-date with local market trends to perform real-time adjustments. It’s also highly recommended that you expand your data sources by looking through appraiser databases and county records for information that might be listed outside the MLS.
Don’t create a surface-level CMA. Make sure you identify neighborhood developments, recent renovations, and other minor factors that might contribute to the price of a home. You should also seek opinions from other experts in the real estate industry. Don’t rely on your knowledge alone.
Use the latest software tools to gather better insights that will help you craft an effective CMA. It would be best if you remained objective while making a CMA. Please don’t allow your biases to impact the report itself.
Conclusion
Whether buying a home or selling one, a CMA should play an integral role. If you’re a seller, this analysis makes it easier to set a listing price that buyers will find appealing. As a buyer, you can benefit from a CMA when searching for homes in your price range. You can also use your agent’s information to make an offer the seller will accept.