Whether you’re looking at listing a property or you’re looking at buying a property, if you’re with a solid real estate agent, he or she will likely do a Comparative Market Analysis (CMA) either on your property or prospective property to determine what the best listing or buying price for the property would be.
If you are like me and believe that knowledge is power, then you might find it valuable to know how to do a comparative market analysis for real estate. If you have a realtor working for you, it is not essential for you to conduct a CMA step-by-step on your own. However, it is certainly valuable for you to understand exactly how a CMA is conducted and to know that your realtor is doing one for you so that you understand the process behind prices are reached.
CMAs are particularly important on the selling end because every buyer wants to get the best price for his or her property and, more often than not, buyers have reasons to believe their properties are worth as much, if not more, than what is around them. Sometimes this is true. But sometimes this is not. Properly-conducted CMAs help realtors arrive at the best price for your specific property and avoid the pitfalls of either low-balling the market in the hopes of generating more interest, or overpricing a property and leading to property stagnation.
What is a Comparative Market Analysis?
Unlike an appraisal,a Comparative Market Analysis (or CMA) is not designed to establish market value, but is rather used to assist a seller in establishing a listing price. The CMA is commonly used by realtors to assist the seller in comparing property with others in the marketplace.
The CMA is typically presented in form format – in Ontario, the form is referred to as a Residential Market Comparison Guide. It includes homes that are currently for sale, have recently sold, or on which listings have expired or did not sell in a defined time period.This information provides the seller with an indication as to what buyers are prepared to pay, given current market conditions.
When is a Comparative Market Analysis Used?
The CMA is an often-used and valuable tool that realtors create for sellers, sharing information with them to determine existing market conditions and obtain saleable listings.
Comparative Market Analysis parallels, in some ways, the direct comparison approach used in a formal appraisal process, however, it is only intended as a general guide to competitively price a property without the exact adjustments usually included in appraisal reports.
Completion of a CMA in any transaction is optional. Depending on how your realtor works, you can either get a fully-completed CMA, a partially-completed CMA that can be used as a starting point for discussions, or no real CMA at all. Again, when choosing a realtor, it’s important to choose one that offers you the type of information, products and services that are important to you (Click here for my post on how to choose the right real estate agent for you).
How do you create a Comparative Market Analysis?
CMA form preparation is fairly straightforward, with room to describe comparable properties currently for sale, sold within the last 12 months, and that expired within the last twelve months.
Section 1: Comparables for Sale Now
Within this section, comparable properties are generally selected and listed in order of closest similarity based on type, location and features, with significant differences and/or similarities highlighted for each comparable property chosen to justify its inclusion.
The current for-sale market provides sellers with an overall perspective to assess their likelihood of selling and in what general price range.
Investors looking to conduct their own impromptu CMA can easily glean this information from listing websites such as Realtor.ca. However, they must be mindful that enough information is gleaned about comparable properties to justify its inclusion and that no subjective bias is clouding the sellers’ analysis. Oftentimes, this third-party, arms’-length perspective is what is particularly valuable of having a realtor on hand to deal with your portfolio.
Section 2: Comparables Sold in the Past 12 Months
Listings in this category represent what buyers pay for comparable properties – information that can often be just as, if not more so, valuable than what listings are listed at for sale.
The more recently-sold comparables are more relevant – assuming that the properties selected are more or less comparable with the property under scrutiny, of course.
Realtors are generally the only ones with access to information about what other listings have sold for in the past.
Section 3: Comparables Expired in the Past 12 Months
This section outlines properties that did not sell. While the precise reason for no-sale situations vary, this information generally provides valuable insight concerning the max-price comparable properties should be listed for. Chances are if comparable properties were listed for $800K, for example, and these ones did not manage to sell, price could have played a major role. If the market conditions haven’t changed since the comparables in this category were listed, then those indicate an upper value for the current property being analyzed. The more recently expired listings are more relevant, of course.
Realtors are generally the only ones with access to information about which listings expired in the past, how long they were previously up for, what they were listed for, and when they were taken off the market.
Usually, at the bottom of a CMA, there is room for a realtor to include recommendations for both maximum list price and probable selling price, along with expenses that will lead to an estimate of net proceeds.
When should a Comparative Market Analysis be completed?
A CMA is important to conduct and discuss at the onset of a property being listed so that the property is listed at the right price the first time. This will ensure the seller gets the most bang for his or her buck (by avoiding underpricing), while ensuring the property in question does not face challenges associated with overpricing (low traffic and stagnation, for example). Not doing the work upfront on a CMA can mean a whole lot of time, and thousands, if not tens-of-thousands (or hundreds-of-thousands, depending on your market!) lost.
So, when you boil it down, why should a Comparative Market Analysis matter to me?
The competitive position of a seller’s property is extremely important. When developing a CMA, it’s important to select properties carefully to ensure properties selected as comparisons currently for sale are as similar as possible to the property in question.
As a seller, it can be hard to view owned-properties objectively. Have you ever fallen into the trap of thinking, for example, “I spent $700,000 on this property four years ago, so I should be able to get at least that (if not much, much more) on this property now.” Or perhaps you have enjoyed a property for a long time and can’t see why someone wouldn’t want to pay more for your basement hot tub. As mentioned earlier, the arm’s-length expertise of a realtor cannot be denigrated during these key transactions, even if the pill might be tough to swallow. Their expertise are designed to save you time and money.
Ultimately, the responsibility to set a listing price rests with the seller, not the realtor. A realtor cannot force a seller to list their property for one specific price – they can only provide their suggestions based on their unique view and access to the market. The seller is entitled to the realtor’s professional opinion regarding property value and listing price, and a carefully and objectively-developed CMA is usually prepared for that purpose. Whether you care for a CMA or not, it’s worth reviewing one or even just having a CMA-like discussion with your realtor. If you’re a “all-hands-on-deck, I’ll-do-it-myself” kind of guy or gal, all the power to you. You can have a head start by considering the information included above that a CMA usually contains.
A well-priced property is usually a sold property, so make sure your price is right from the beginning with a well-done CMA.
Have you ever had a CMA done before or have even tried to complete one yourself? Still not sure what to think about a CMA or have any more questions? Don’t hesitate to drop them in the comments below.