Last Updated on January 11, 2024 by Luke Feldbrugge
The comparative market analysis is a tool that makes a real estate agent indispensable – for the seller and the buyer. Getting the price of a home wrong can cost everyone a lot of money, so it’s important to get the CMA right. Prospective clients might think, since agents usually offer CMAs as a free service, that they aren’t a lot of work. However, there advantages to educating your clients about how they work and how there are a lot of moving parts to even the simplest comparative market analysis.
Coming up with a market-based price for a home is both a science and an art. There are a lot of numbers and even some algorithms that can help you do a CMA report on a property, but there is also some gut-level estimating involved.
Of course, folks can do it themselves and there are a lot of tools online that will help them do that, but the overwhelming consensus out there is that this is best left to professionals like you. That’s because there are margins of error in any estimating tool, and being 2% off on a $400K house is still a lot of money.
In most cases, when we talk about sellers in this blog, we mean both sellers and buyers, because both parties may request a CMA for the same home to make sure they are both getting a good market-based price.
What is the Comparative Market Analysis?
You’re going to be called on to explain your real estate CMA multiple times to your clients, so it’s best to prepare for it. It’s very much on the educational side of the real estate agent list of skills, so coming up with a presentation or list of talking points (or even an elevator speech) is a good plan. It’s also a conversation that’s loaded with emotion because you are giving an expert opinion on what a house is worth, and sellers have their own ideas about what constitutes a fair price.
At ground level, the CMA takes a look at the comparable properties around the seller’s house and comes up with an appropriate listing price based on similar features. Let’s take a look at some of the elements.
Factors in a Comparative Market Analysis in Real Estate
- Age of the house – The CMA includes similar homes that are within a few years of the seller’s home in terms of age.
- Location – Geographically, the similar properties need to be in the same immediate area, usually within a 2 mile radius of the seller’s home.
- Comparable rooms – The detailed report will include the price range for homes that have the same number of bedrooms and bathrooms when possible.
- Square feet – It seems like a no-brainer, but the analysis will include homes of similar size with similar square footage.
- Type of home – The market report needs to be apples-to-apples, meaning it won’t compare a single-family home to a condo.
- Lot size – Homes with comparable lots will be part of the analysis.
- Upgrades – Big changes to a home, such as a kitchen reno or a total bathroom makeover, can affect a home’s value. These need to be reflected in the CMA and the homes in the comparison.
- Special features – This is sort of the miscellaneous category if the seller’s home has a swimming pool or is on a lake or has a pickleball court. It might be tougher to find comparables for less-than-typical amenities.
When Art Meets Science in the Comparative Market Analysis
Finding exact duplicates of a seller’s property, especially in a two-mile radius, can get a little tricky. You can gather the comparable homes, crunch the numbers and come up with a number, but that might only get you so far. To generate an accurate and useful analysis for the seller, you are also going to need to interject your own knowledge and expertise into the CMA’s final price.
Most Important: Your Market Knowledge
Probably the most important asset you bring to the table is your knowledge of the local real estate market. For example, your seller’s house could be in an up-and-coming neighborhood that will be positively hot in the next few years. You know that. Other agents may know that. Comparable list price calculators may NOT know that yet.
Likewise, as a local real estate agent, you may know that the location is associated with a strong school district, but you may also know that a referendum just passed that will upgrade the school with a totally new sports facility. That improvement to the school could affect the value of the seller’s home quite a bit.
Go Beyond Comparable Sales
One limitation of a CMA is that it often only compares the seller’s home to other comparable sales. When you’re dialed in, you know about properties are under contract and pending. Include that information in the CMA to get an even more complete number.
Educating your clients and prospective clients about the CMA will show them it’s more than just a price tag they can put on their house. It’s an analysis that draws from data and your real estate business intelligence of the local market.
All CMAs are not created equal. Each will be different, depending on the agent. The more relevant information about a property you can present to a prospect or client, the better chance you have of impressing that individual to the desired end point of them burning your name and face in their memory banks as a trusted professional.
Make your comparative market analysis unique to you, and give your prospects and clients what they need to be informed, beyond what your competitors typically do.
Not an Appraisal
You will need to explain to clients that the CMA and the official home appraisal, ordered by the mortgage lender, are not the same thing. However, feel free to inform your prospects and clients that there is some overlap.
Simply put, an appraisal is a financial opinion of a property value. As a financial opinion, the appraisal is created to show the lender that it is not taking too much risk in giving the loan to the buyer. In this case, risk means “if the buyer defaults, can we sell the property and get our money back.”
The CMA addresses the value of a home from a different perspective that includes two important questions:
- How much is the property worth?
- How much can the seller get for the home in the current market conditions?
Both the appraisal and the CMA will look at similar things, such as square footage, lot size, comparable houses that have sold, but clients need to know the difference.
It’s also important to remind them that your CMA is free but, an official appraisal will typically cost between $300 and $500.
Importance of a Comparative Market Analysis
For sellers, especially ones that have been in their house awhile, knowing what their house is worth is more important than ever. There is increasing awareness that homeowners don’t know how much equity they have built up in their houses.
During the last 20 years, beginning in 1991, home values have increased 54.4%. The pandemic housing boom, however, blew those numbers out of the water. In the past 5 years, those same homes increased in value an average of 258% (according to the FHFA).
Consequently, owners don’t know how much equity they are sitting on. Even if they had a Competitive Market Analysis recently, there’s a good chance it’s likely out of date in the wake of the housing boom.
Predictions about home price growth over the next five years – with low inventory and lots of buyer demand – means that CMAs are going to have a short shelf life and may need to be updated often. The good news is that sellers that see CMA on an ongoing basis may begin to see the windfall of equity building up in their home. That could make them more interested in making a move. So, keep sending out those CMAs!
Use the Comparative Market Analysis for Prospecting
A full blown CMA can involve a lot of work, so are they any good for prospecting? Once you are in a relationship with a seller, the work of the CMA makes perfect sense. Doing lots of them as a first step to open a conversation with potential clients may seem like a lot of work to take on.
This is where you might want to do a streamlined CMA using some of the software that’s out there. They can help you churn out a lot of comparative market analyses that you can use to prospect. It won’t be a full analysis (and you might want to add that disclaimer) but it will be a ballpark estimate that might get prospects interested…maybe more than interested.
In light of all the equity out there, a lot of homeowners may not know that they want to sell until they begin to realize how much they would get for their home. The number you generate for them might “wow” them into accelerating their plans to:
- Downsize their home
- Move closer to family
- Use some of the equity to do all the traveling they’ve talked about
- All of the above
The Boomers, in particular, are sitting on a lot of older homes, and a lot of equity.
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