When you see the listing price on a home, who do you think decided what the price ought to be? (You know by now that the asking price is not necessarily the same as the market value, appraised value, or assessed value.)
Does the property owner figure it out? Does the agent get to make that call?
The answer is that it’s usually a collaborative discussion. The seller gets the final say, but it’s the agent’s responsibility to present a well-researched price range to suggest to the seller.
Learning to CMA
This chapter will prepare you to conduct a comparative market analysis. Creating a CMA is a crucial skill for listing agents who are helping their sellers determine a listing price.
Not only is pricing a property one of the most important things you’ll do for a client, it’s one of the first things you’ll do for a client.
In fact, more often than not, this “client” will only be a potential client at this point in the process. They will be waiting to see what you bring to the listing meeting before committing to and signing a listing agreement.
CMA Real Talk
In this chapter, we’re going to walk through the process of doing a CMA using a worksheet so that you understand how everything works. But I’ll be honest with you, Anthony, in the real world, you will almost certainly have a sophisticated digital analysis tool at your disposal to do all of this for you.
In any large, data-driven agency, creating CMAs with a program that uses regularly tweaked algorithms is de rigueur. I just want to let you know so you don’t show up on your first day, clutching your spreadsheet and a pencil, feeling like a nerd.
CMA vs. CMA
More real world talk! Almost everyone you meet in the real estate biz will call a CMA a CMA. If you ask them what CMA stands for, some people will tell you “comparative market analysis” and some people will tell you “competitive market analysis.”
Turns out, they’re both right! Comparative market analysis and competitive market analysis are generally considered to be synonyms, so don’t let it throw you if a co-worker says “competitive” when you are used to “comparative.”
In this course, we’ll stick with “comparative,” because not everything has to be a competition, Anthony.
Who Prices a Home, and How?
A comparative market analysis (CMA) is a report that compares the prices of recently sold or listed homes (“comparables”) in order to estimate the market value of a similar property (the “subject property”) located in the same area. This is the tool you’ll use to guide your client towards a proper price for their property.
Before we do our how-to, let’s talk about what a CMA is and, perhaps more importantly, what it isn’t.
CMA ≠ Appraisal
Let’s get this out of the way right now: A CMA is NOT an appraisal.
Here are a few significant differences between the two:
You must have an appraiser’s license to create an appraisal.
An appraisal is usually done for a fee.
An appraisal conforms to the Uniform Standards of Professional Appraisal Practice (USPAP), while a CMA does not
A CMA can be done by anyone, including a licensed real estate agent.
A CMA is usually done for free.
A CMA is less detailed AND less reliable than an appraisal.
How They Are Alike
In spite of those differences, a CMA and an appraisal have a few things in common:
Both are used to arrive at a fair market value of a property.
Both use a sales comparison approach that is based on the principle of substitution and the principle of contribution.
The CMA: What It Is and Is Not
Location is one of the primary factors that determines a subject property’s value. You can remodel, renovate, or even rebuild a home, but you can’t change its location (at least not without a great deal of cost, effort, and magic – excluding tiny homes on wheels). Buyers understand that they have to be happy with a property’s location as is.
When we talk about the role of location in real estate, Anthony, a large part of what we’re really talking about is the impact of the neighborhood. This includes the houses that immediately surround the subject property, the street the subject property is on, and – of course – the characteristics of the neighborhood as a whole.
As we discuss the impact of location on market value, be aware that, within the same neighborhood, property values can vary greatly. A house backing up to a green space or on the waterfront will be more expensive and in much greater demand than an identical house located on the other side of the same street.
Three principles of value (remember these? they’re back to party!) are at play when evaluating the subject property and its neighborhood:
The principle of conformity says that values are highest when the houses in a neighborhood look roughly the same.
The principle of regression says that a subject property situated in the midst of lower-value homes will experience a downward pull on its own value.
The principle of progression says that a subject property situated in the midst of higher-priced homes will experience an upward pull on its own value.
Other Neighborhood Factors
Here are a few other factors to consider when analyzing a neighborhood to see how it will influence a subject property’s market value:
Percentage of rentals vs. owner-occupied homes (high rental percentage lowers value)
Presence of vacancies or foreclosures (these lower value)
HOA codes (used to regulate home appearance, maintenance, and use)
Zoning (how is it zoned? is it in transition? is it mixed-use?)
Street width and condition
Utilities (electric, gas, sewer, cable, internet, etc.)
Public services (transportation, police, and fire)
Access (to major roads, stores, entertainment, employers, schools, etc.)
Environment (noise, traffic, smells, wind)
Geography (varied or uniform, flat, barren, steep, hilly, etc.)
Contamination and Pollution
Another thing to be aware of in terms of location is the possibility that a property has been contaminated. As old industrial land is rezoned into residential land, there are concerns that there could be soil contamination, underground storage tanks, or other troubling environmental factors.
Additionally, lots next to gas stations or former gas stations, dry cleaners, manufacturing facilities, or chemical storage areas are likely to have some contamination. Homes near highways that have been in place since early in the last century may have lead in the soil from car exhaust.
Finally, there are an increasing number of areas where municipal water supplies are unsafe to drink, due to contamination from heavy metals or pollutant runoff. Be aware of whether or not this is an issue in your subject property’s area.
Step 1: Evaluate the Neighborhood
Once your outside-in evaluation approach has landed you on the doorstep of the subject property, what do you do next? Knock on the door and try to sell magazine subscriptions? (No.) How about thin mint cookies? (No, but save me some!)
The next step is to collect as much information as possible about the subject property so that when you look for comparables, or recently sold or listed homes you will use to determine the subject property’s price, you’ll know that you’re comparing apples to apples in your CMA.
The Lot Matters Lots!
Before we focus too much on the structure, though, let’s back up a bit and give the lowly lot its five minutes of fame.
The lot is the plot of land a structure sits on. There are many attributes and features to a lot that will influence a property’s market value.
Lots to Consider
Some of the lot features you will want to make note of and consider as you build your CMA include:
Size and dimensions (standard shapes are more desirable)
Frontage (can increase value if it gives access to certain features)
Landscape (flat, hilly, wooded, etc.)
Orientation to sun and amount of shade
Exposure to the elements and environment (wind, noise, etc.)
Title concerns (easements, encroachments, etc.)
Stigmatization: a stigmatized property is one where a violent act or illegal activity has occurred, is claimed to be haunted, or has any other negative associations known to people in the area
Homing in on the Home
Once you’ve taken a thorough inventory of all the features of the lot, turn your attention to the home itself.
You might find it helpful to take the same outside-in approach we used before, especially as you document the age and general condition of the home. Include the quality of the construction and materials, and find out if the neighborhood was developed with multiple builders. (Take note of which builder constructed the subject property’s home, as some builders have better reputations than others.)
The size of a home is one of the primary factors that influences the market value of a property. This is why appraisers prefer to stay within 10% of the net square footage when comparing one home to another. Before you can make comparisons, you need to nail down that square footage.
While there may be some variance in method when calculating square footage, it’s important to know that some municipalities have standards in place for these calculations. Make sure you know if that’s the case in your area.
Number of Rooms
Count the total number of rooms, making note of the number of bedrooms and bathrooms. And remember that bathrooms are further broken down by whether they are a:
Full bath: tub and/or shower, sink, and toilet
Half bath: sink and toilet
Offices or dens should be noted, as they can easily be converted into a bedroom. If a dining area is truly separated from the kitchen and living area, that, too, should be noted.
Step 2: Evaluate the Subject Property
The next step is to collect the same information on your comparables as you did for the subject property. Remember that the comparables should be recently sold homes in the area that closely match the subject property.
Because of the work you did in evaluating the subject property, you know what to look for, so you should have a baseline of sorts to work against.
Let’s get into the details of what makes a good comparable.
A good comparable is a property that was sold less than six months ago. See several similar properties that sold within the past three months? That’s even better! This guideline has to be a little flexible since some markets have more sales per month than others, but appraisers will usually set the upper limit at 12 months. Select at least three comparables.
Depending on where you live, the final sale price may or may not be publicly listed. If so, great! If not, it doesn’t hurt to ask the agents involved, if you know one of them. Otherwise, you have to guess based on the listing price.
Arm’s Length Transactions
Also, make sure you’re only using what are known as “arm’s length” transactions for your comps. An arm’s length transaction is one where both agents are acting impartially and arrive at a fair price.
Essentially, try to exclude sales between family members or friends that may not be at market value, pocket listings that sold for less because the agent took a lower fee, or any sales that would have weirdly low or high prices for reasons that don’t have to do with the property itself.
The MLS listing for recently sold homes will also provide the original listing price and days on market, which may be useful in the property pricing discussion.
Close to Home
In most cases, a good comparable is a property that is within a quarter-mile to a half-mile of the subject property. This rule does not apply if the subject property is in a rural location or if the market is so slow that there are very few comparables to choose from. In these cases, you may have to expand your horizons a little.
While newer construction generally commands higher prices, some older, mid-century, or pre-war homes are also highly valued if they are kept in good condition or refurbished. And some builders have a better reputation for quality construction than others, so houses built at certain times or by certain builders might hold value better than newer, lower-quality homes.
In the end, to make an apples-to-apples comparison, do your best to keep your comparables around the same age and in the same neighborhood.
Step 3: Get Your Comparables
Is it okay to use comps that are still for sale? It’s not ideal, and here’s why.
On one hand, pending sales are great because they reflect the most up-to-date buyer/seller behavior on the market. On the other hand, they are NOT final, so the ultimate sales price is unknown. Technically, the listing agent shouldn’t be sharing information like the agreed-upon price until the property has closed, but it never hurts to ask for any details that the agent is willing to share.
And, as with recently sold homes, make a note of days on the market and any price reductions publicized in the listing’s history.
Sellers are usually very interested in the current listings in their area, as they should be — but perhaps not for the reasons they should be.
Sellers see current listings as competition and can be tempted to price their own home according to what others are asking.
But, in the words of parents everywhere, “If your best friend jumped off a bridge, would you jump off a bridge, too?”
People can ask whatever they want for their homes, so the asking prices of current listings might not be grounded in reality. After all, asking isn’t getting.
Many homes sell for much less than their asking prices, to the extent that some say current listings are a good indicator of what homes won’t sell for. The fact that it’s not a “sale pending” or “recently sold” home means that home does not have an interested buyer at the listing price.
Expired Listings & Re-listings
More than anything else, expired listings and re-listed properties can serve as teaching opportunities in the listing agreement conversation.
The primary cause of expired listings is improper pricing – a re-listed property can show the importance of getting pricing right the first time. If you’re going to make note of a re-listed property that eventually sold, be sure to add the days-on-market together from both listing episodes.
A Note on Sold Properties
What I really want you to take away from this, Anthony, is this: One of the best things to look at when trying to determine the price of a property is the price that willing buyers have recently and actually paid for similar structures. This is the most accurate way to get a price assessment for a property without a formal appraisal, especially in new and rapidly selling neighborhoods.
Sale Pending, For Sale, and Re-listed Comps
As much as we’d like the CMA to be filled with clean, apples-to-apples comparisons, the fact is not all apples are created equal. Not to worry, though, there are ways to make adjustments to the comparables (comps) and account for the differences between one apple and the next.
Typical adjustments for comparables found on a CMA include:
Number of bathrooms
Number of bedrooms
Size of lot
Garage (how many cars fit)
Basement (finished or unfinished)
Age of the property
How to Price the Adjustment
There are several ways to arrive at the dollar impact of comparable adjustments. Eventually, you’ll join the ranks of the experienced license holders who just kind of know the value of certain features of a home. But brand-new license holders (like you!) can make adjustments to the comps by looking at recently sold homes that are identical in all ways except for one feature and then attributing the price difference between the two homes to that one feature.
Here’s How It Works
For example, if two recently sold homes were deemed to be identical in all respects other than the fact that one had an additional bedroom, the $5,000 sales price difference between the two homes could be reasonably attributed to the extra bedroom.
That $5,000-per-bedroom figure can now be used as an adjustment price to add or subtract to the overall sales price of your comparables as needed.
When the comparable home has features or amenities the subject property lacks, you must subtract the value of that feature from the price of the comp.
Conversely, if the comp lacks a feature or amenity that the subject property has, you must add that feature’s value to the comparable’s price.
Let’s take a look at this chart, and the one on the next screen, to see comparable adjustments in action:
Chart showing to add or subtract from price of comp if the subject property includes a certain feature.
Step 4: Compare & Adjust the Comparables
As you search for comps for the subject property, you should look for an exact match. More often than not, however, that won’t be what you find and you’ll have to make sales price adjustments (like we did in the example I just showed you). Once you have those adjusted comp sales prices, you can create a suggested price range for your prospective client: That range will usually start at or just below your lowest adjusted comp’s value and end at or just above your highest adjusted comp’s value.
The Seller Has the Final Word
The comparables that required the least amount of adjustments will be the ones you lean on the most when you create the suggested price range for the subject property.
Ultimately, the listing price will be decided by the owner – not you. But it will be your research and price range that will give the owner a realistic market starting point.
Listing Price: Market Considerations
When settling on a listing price, you will want to help the seller understand the market environment, as this will impact the listing price.
For example, in a buyer’s market, the seller might want to consider a buyer-friendly price just below the top end of the range you provided. They should understand that the actual agreed-upon price will probably come in under that.
In a neutral market, the seller might want to start closer to the top end of pricing and adjust for the market trend.
For example, if the last comparable sale closed a few months back, but the median price for homes in the area have inched upward 1% per month, add that amount to the list price for every month that has gone by since that last comparable closed.
In a seller’s market where prices are moving up and inventories are shrinking, the seller can add 10-12% to the last comparable sale and still attract buyers.
Step 5: Establishing a Listing Price Range
Overpricing is one of the most common reasons properties don’t sell.
That’s because many sellers think their property is more valuable than any other in the neighborhood. This is a natural thought, but not necessarily the best thought to cling to in a real estate transaction. That’s where you come in, Anthony: It is the real estate agent’s job to let the owner know what price is practical. (This is also the primary reason a comparative market analysis is crucial during a listing appointment with the owner.)
Help Them See the Property Objectively
You have to help the seller step back from their emotional attachment to the home and see it as a buyer would. After all, precious as it may be to the seller, it doesn’t actually add value for the buyer that little Persimmon learned to ride her bike on this driveway, or that sweet Ozymandias took his first steps on this tile.
If you cannot get the owner into a realistic price range, you may need to walk away from the listing. For most new license holders, this lesson usually takes at least one year to learn (but hopefully not for YOU, my Aceable Agent!), as new listings are always tempting.
Here’s how it usually plays out: An overpriced listing sits on the market with very few showings, and the seller calls the listing agent repeatedly to ask why the home hasn’t sold yet. Eventually, the listing expires and another sales agent takes over the listing. Sigh. The circle of (overpriced) life.
Don’t Say Reduction
Sometimes the only cure for overpricing is a price adjustment.
It is important to note that this act should be called a price adjustment and NOT a price reduction. The word “reduction” carries too many emotions for the seller and will make them less likely to want to work with an agent. So when it comes to the word reduction, steer clear!
As far as pricing goes, it’s important to remember that the sales price is far more important than the listing price.
The common misconception sellers have is that they can list higher and adjust the price downward if they need to. Worst case scenario is they just get market value, right? Well, not really. This is not usually the case because:
The longer a property is on the market, the more likely buyers are to perceive a “defect” in the property (i.e., why hasn’t it sold yet?), which makes them less likely to pay higher prices.
A smart buyer’s agent will see multiple price adjustments on the property’s history and likely ask for many more concessions (which could result in the seller getting even less for their adjusted price than they anticipated).
The Benefits of Underpricing
So, instead of overpricing, some savvy seller’s agents — particularly in seller’s markets — will advise their clients to list at a price just below the comparative market analysis’ suggested value.
This can create a bidding war or multiple offer situation due to increased buyer traffic early on in the listing period. In many cases, the seller could get far more money by listing the home for less versus if they had overpriced the listing from the start.
The Strategic Approach to Pricing
That’s called a pricing strategy. Pricing a home to sell for the most it possibly can requires more than just doing a CMA and picking a reasonable price based on your findings. An agent must devise a strategy that will result in the desired sale price. Tricky!
If that sounds complicated, well, it is. It requires up-to-the-second knowledge about your market’s peculiarities and quirks, in addition to more widely known data like which way things are trending and whether it’s a buyer’s or seller’s market.
That’s the kind of knowledge you’ll learn in the field by doing it a few times, and from your mentors at your brokerage. So don’t worry if this sounds like a lot. Pricing is a skill you have to learn, just like any other.
Multiple Listing Service
Once you’ve got a good listing price, what do you do with it?
Put it on the MLS, of course! A multiple listing service is a database in which local member brokers share listings so that fellow member brokers can procure buyers for those properties and establish compensation for properties sold jointly.
All About the Sales Price
There’s one more value estimation we need to talk about in this chapter, and it’s called a broker’s price opinion, or BPO.
Note: This may also be referred to as a broker’s opinion of value (BOV).
A broker’s price opinion is similar to a comparative market analysis. It’s created by a real estate license holder, not a licensed appraiser.
It’s an estimation of property value that may be even shorter or less formal than a CMA. Like a CMA, it doesn’t conform to USPAP. It is generally given in writing, and done for a fee. A BPO may be more commonly seen in commercial real estate settings than in residential real estate.
BPOs in Arizona (A.R.S. 32-3602(A))
Arizona prohibits anyone not licensed as an appraiser to call their valuation an “appraisal.” Only appraisers can create appraisals. However, as long as an agent or broker doesn’t call their BPO an appraisal, they can charge money for performing the valuation.
CMA vs. Appraisal vs. BPO
Let’s see how these three types of valuation stack up against each other.
Chart summarizing the differences between an appraisal, CMA, and BPO.
Broker’s Price Opinion
All good things must come to an end, Anthony. So it is with life, and so it is with this chapter. But before you go, let’s review some of the important terms, concepts, and principles you’ve learned along the way.
Here are the key terms you learned in this chapter:
any property which has sold and is similar enough in features, location, and proximity in time to inform the value of a subject property
comparative market analysis (CMA)
a report that compares the prices of recently sold or listed homes (“comparables”) in order to estimate the market value of a similar property (the “subject property”) located in the same area
multiple listing service (MLS)
a database in which local member brokers share listings so that fellow member brokers can procure buyers for those properties and establish compensation for properties sold jointly
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter.
Creating a CMA
These are the steps to creating a CMA.
Infographic showing the steps to create a CMA.
Multiple Listing Service
A multiple listing service is a database in which local member brokers share listings so that fellow member brokers can procure buyers for those properties and establish compensation for properties sold jointly.
CMA vs. BPO vs. Appraisal
Remember the differences between these three types of valuation.
Chart summarizing the differences between an appraisal, CMA, and BPO.