Valuing a home: the Comparative Market Analysis

Having just completed the required coursework for the Pricing Strategy Advisor certification, this seems like a good time to describe one of the most vital services we provide our seller clients - determining the value of their property. A CMA (Comparative Market Analysis) is an estimate of the likely selling price of a property at a given point in time. We provide them to every prospective seller client as well as to any former client looking for an update on the value of their home.

CMAs are not the only valuation services used in real estate, so before we go further, let’s talk about what they are not. CMAs are not appraisals, which are completed by a licensed or certified appraiser and are generally used to value collateral for the lending institute that is providing a mortgage on the property. They are also not automated valuation models (AVM) which services (like Zillow) utilize to estimate value based on mathematical modeling. A good comparative market analysis most certainly relies on data but it also takes into account current market trends, knowledge of buyer preferences, and an understanding of the value of different home amenities and improvements. A really good CMA provides a clear explanation of the reasoning behind the estimated value so that the recipient is never left to wonder how the provider of the analysis arrived at the numbers.

Before we go further, let’s review a few basic principals of valuation. Ensuring our clients understand these basic valuation principals is key to helping them understand the pricing report we prepare for them.

• Cost is not necessarily value This can be hard to hear, but what you paid for your house at the height of a real estate bubble has no bearing on what it’s worth today.
• Maintenance costs don’t contribute to value dollar for dollar There very few home improvement that will net you 100% of the project cost when it comes time to sell. That doesn’t mean that updated homes aren’t more valuable, they most certainly are, but only to a point. All buyers expect a functioning kitchen so the fact that you spent $75,000 upgrading yours doesn’t mean that your home is worth $75,000 more (according to the 2020 Cost Versus Value Report, you can expect to recoup approximately 58% on average).
• Regression and progression The surrounding property values impact the value of a subject property. Look around your own neighborhood - aren’t the houses roughly in the same price range? There are sometimes outliers (the new construction McMansion amongst more modest homes and the last hold out in a gentrified location that hasn’t been bought up by developers) but the values of these outliers are impacted by the surrounding properties.
• Conformity The cousin of regression and progression, this is the maximum value of homes in a given neighborhood.
• Substitution No one will pay more for something they can get cheaper somewhere else. Imagine your home is listed on the market and another house, in similar condition, with the same number of bedrooms, baths, square footage comes on the market for $10,000 less than your home. Can you guess which is most likely to sell first?

CMAs are part science and part art. The science is the comparable properties. We research recent sales of similar homes (similar in terms of location, size, style, amenities, etc). How far back we look depends on a few factors including: uniqueness of property, type of market (seller’s versus buyer’s), quantity of comps, etc. but more than 6 -12 months and the information is typically too dated to be informative. We include more comparable properties in our analysis than many others do because we want our clients have as much information as possible. We describe how the properties compare to the subject home, pointing out the assets and limitations of each. Valuing a home’s assets and limitations is the art part of the calculation. It’s a qualitative process that requires our knowledge of what current buyers value and an understanding of the micro-level nuances of the market. While there are automated programs, within the multiple listing service, that generate market analyses, we prefer to customize our CMAs, which means more work for us but results in a higher quality output.

Recently sold comps are an important part of the market analysis, but it’s also crucial to consider active competition. The number of other homes for sale in a neighborhood can impact the price at which an owner lists their home. We want to ensure that the competition sells your home and not the opposite. Think about it, if there are two similar homes for sale, an agent is likely to show their buyer both and the principal of substitution tells us that the buyer will purchase the home that is listed for the lower price.

A McSharry and Associates CMA provides our clients with an evaluation of their home’s assets and limitations, a comprehensive review of recent sales and current competition, an understanding of current market conditions and a recommended list price range. Bottom line, we strive to share all the information necessary so that sellers will list their homes at a price that will ensure they sell their home for the most amount of money in a reasonable amount of time!