The most common method that real estate agents use in appraising a home is through a CMA. CMA is Realtor-speak for Comparative Market Analysis. In formal appraiser language, it’s the Sales Comparison Approach. If you’re curious about the technical details, my favorite resource is the textbook, The Appraisal of Real Estate, 14th Edition, published by the Appraisal Institute. Chapter 18, page 377 is where the fun stuff begins!
Let’s start with some definitions of terms that will help make the rest of this article more comestible–
- Subject property: the property in question. Either the property a buyer wants to buy and needs a CMA done on it, or a property a seller wants to sell.
- CMA: people use a lot of different terms when talking about how to value a property. Other terms used instead of CMA include valuation, appraisal, and market analysis.
- Comparable property: the properties used in a CMA to come up with an estimated sale price for the subject property.
In a nutshell, a CMA looks at recent sales where the comparable properties are similar to the subject property. I’ll outline the logic behind the comparable property in the numbered list below, specifically for how to analyze ONE comparable property.
- Say the subject property is a 2-bedroom 1-bath condo in a 3-unit multi-family building. No AC, no parking, no outdoor space, but completely renovated inside. And on the middle floor of three floors.
- A comparable property might be another 2-bedroom 1-bath condo in a 3-unit multi-family one block away. Let’s called this Comparable #1. And the person that bought Comparable #1 is Buyer #1. Let’s say Comparable #1 sold for $500,000.
- If Comparable #1 is the exact same as the Subject, except that Comparable #1 has parking, then we ask the question, “What would Buyer #1 have paid for Subject if Comparable #1 had no parking?”
- The answer to the question above is that Buyer #1 would have paid the same amount MINUS the value of Comparable #1’s parking space.
- Let’s say that the value of parking in this neighborhood is $50,000.
- Therefore Buyer #1 would have paid $500,000 minus $50,000 = $450,000 for Subject.
- $450,000 is now considered the Adjusted Price of Comparable #1. The adjusted price is the amount that Buyer #1 would have paid for Subject had she been in the market today for Subject instead of having been in the market and purchased Comparable #1.
Now we do the same thing for a few more comparable properties, and put it all together. Example:
- Maybe Comparable #2 is exactly the same as Subject but in a cheaper neighborhood–that means Buyer #2 would probably have paid MORE for Subject than she did for Comparable #2.
- And so forth with Comparable #3 and/or more.
- Let’s assume we have three comparables.
- At the end, we have three adjusted values. Say they are $450,000, $550,000, and $500,000.
- The average of the three adjusted values is $500,000.
- The CMA thus shows that on average, based on the behavior of three recent buyers of properties similar to Subject, the value of Subject is $500,000.
Most real estate agents will use the CMA tool found on MLSPIN, which basically lets agents set up the comparable properties in a template and do the adjustments as needed in order to make the comparable property look similar to the subject property. Here’s a screenshot of a portion of a CMA I did recently for a client.
You can see the Subject and two Comparables here, and the adjusted values in the bottom half, with the Adjusted Price at the bottom.
Note that not all real estate agents use this format, nor do they use this level of detail. Some use more, some use less. I know some amazing agents that have such a gift for valuation that they don’t even need this tool. At Lembu, I’d say that the type of CMA I did here is about average or below average in terms of quality. Many of our agents actually use customized Excel templates in order to have more control over the numbers and a better ability to edit and automate the analysis.
For more information, you can take a look on YouTube for a couple of introductory tutorials I did on creating CMAs. Also, don’t hesitate to ask your agent for more information, or contact me at email@example.com at any time!