How to Produce a Great CMA
Valuing real estate is often difficult. That's why a real estate appraiser receives 300 hours of education, 1500 hours of experience, and passes a test before being allowed to appraise real estate alone. Sadly, real estate agents receive 0 hours of mandatory education or experience before being "thrown to the wolves" of the open market. I hope that this short article will give you one more tool for the toolbox.
Appraisers have three approaches to value that we must consider in every report, 1) Sales Comparison, 2) Cost, 3) Income. Within these methods, there are qualitative and quantitative methods that are used. What follows is an introduction to the qualitative method of the sales comparison approach.
Look at the history of sales in the neighborhood - Define the market area that a buyer would search for a home like yours in and research the sale profile of the area over the last year. See the low, high and median sale price. If you're planning to set a new record sale price, you better have good reasons.
Narrow in on sales like yours - Select sales that "bracket" the acreage, living area, beds, baths, quality and condition. Get properties that are a little better and worse in every category.
Get picky - out of those sales pick the 3-4 sales that you feel are truly the most similar.
Rank your property - put your property on the spectrum of the properties you selected (a grid of the core characteristics is very helpful for this, with a +/- for superior and inferior aspects). Is it 2nd, 4th? This will help to give you a tighter range of possible sales prices to consider, and given the information from the properties that you already excluded in step 3, you may know whether to stay at the top or bottom of that range.
Test your price - Take your proposed sales price and look at the historic data again. Would you pay that much for your home when the others are also available? If no, then revise your price target.
Look at listings/pending sales - Note that this is the last step. I can want $1,000,000 for a shack all day, but that means nothing to the actual value. Its worth noting that homes that are dramatically overpriced regularly receive below market value offers (this will be the subject of a future blog). It's good to know what you're competing against in terms of other listings, but its a weak data point at best.
Most of the time spent on your analysis should be on steps 1-3. If you've done this well, steps 4-6 will likely be much easier and result in fewer headaches later on. Additionally, if you have the opportunity to provide comparables to the appraiser (VA Tidewater Initiative or Reconsideration of Value), they will respect your diligence is providing professional advice to your client.