During most of our lives few transactions are as important as selling our home and there are few factors as important as the CMA when it comes to pricing your home. The Comparative Market Analysis is the instrument that most homeowners use to determine the price of their homes .Long ago we all learned that statistics are a great way to prove just about anything you want to prove and get just about any outcome you want to get. Real estate is no different, especially when it comes to the infamous Comparative Market Analysis – the CMA. In this article I’ll show you how we calculate the comparative market analysis to make it as objective as possible.
But before we get further into this I just want to remind you of something that you already know. Homes, unlike equities, are not a liquid asset and therefore are not as easy to price on any given day. While you can get a quote on a share of stock on your computer or by phone, home prices are not as easy to come by. The price of a home is not so much a “price” per say, as it is a range. That range is where you can reasonably expect to sell your home. If you price it too low and it’s a good market, then the market, aka buyers, will probably push the price higher to somewhere inside that range. If the market is slow, that may not happen. If your home is priced way above the reasonable price range, it will probably just sit there and not sell until you price it somewhere in the reasonable price range.
Where in that reasonable range a home will sell depends on a number of factors. Some of them, in fact most of these factors, are very personal. Let’s face it, one of the most oft’ quoted reasons for buying a home is that the buyers “fell in love with it”. Someday, scientists may be able to quantify “love”, but that day is not here yet. So where in that price range your home will sell depends on a lot of factors and can represent a significant chunk of money.
Say, for example, that we have a hypothetical home that we valued at $600,000. It is reasonable to presume that similar homes in your area are priced, say, 5% higher or lower than that. So the reasonable range would be $570K to $630K, or 5% above and 5% below our valuation model. This should make it very obvious that where in that range a home sells can affect your wallet in a very meaningful way.
OK, let’s get back to the CMA. My method of evaluating the Comparable Market Analysis is closely based on that popularized by Matt Jones but I’ve made some important additions so that it gives more weight to recent transactions. The average realtor will probably send you a report containing a few properties, 3 or 4 of them or so, consisting of sold homes, pending ones and the ones that are active. That in itself is not a bad thing at all, but it might just be a very incomplete picture. Furthermore, it leaves you open to a great deal of subjectivity and interpretation on the part of your agent.
Here is what I mean by that: go to a bookstore, if there are any left, or go on Amazon.com and search books on how to become a “Top Realtor”. You’ll see a good number of them and what they all have in common is that they tell realtors that in order to be a successful agent you’ll have to learn how to price homes. And by that they meant that the home has to be priced at the bottom of the price range that we talked about above. Realtors are trained to do it this way.
I want to say this one very important thing. In my experience there is nothing malicious in this and I have not met a single agent who will not list a property to the benefit of the homeowner as much as possible. In fact, agents have an inherent interest in selling the home for a higher price because their commission is based on that. So why then are they, generally, pricing homes at the bottom of the reasonable range? Well they are trained to do it. It’s drilled into their brain and they honestly believe that’s the very best way to sell a home. I don’t agree with that kind of thinking, but that’s a story for another article.
Also, agents know that when they present a price, the homeowner will probably want to raise that price. I have yet to be asked to lower a price I set in a listing presentation and I’m pretty sure I’m not alone on this. Just as agents are trained to price homes at the bottom of the range, homeowners are trained, perhaps genetically programmed is a better term, to price homes higher. “Let’s price it higher so we can have room to negotiate” is probably the most common objection every realtor has heard. Is it right or wrong to do that? Well that depends, and I know I’m hedging when I say that, but this article does not address these issues. We’ll do that in a future piece, for now I’ll focus on showing you how to find the correct reasonable price range for your home; or at least this is how I do it for my clients.
If the property is in a market that has a low turnover rate or if the properties in that town are very different from each other, then what I do is pull up the following:
1) The tax records
2) The closed comparables
3) The active comparables.
4) The “under contract” comparables
I’m sure that the first question in you mind right about now is “Why does he pull up the tax records?” Well, because if the home is in a low turnover area without a lot of similar or identical homes such as you may find in a subdivision or in a condominium building, then I need to calculate the adjusted current value for that home to find some sort of an objective base line form where to begin. So if the home sold 3 years ago for $500k and the appreciation rate is 9% to 11% per year, then the average appreciation rate is about 10% per year for 3 years and I add that figure to the purchase price. Unfortunately, in these current conditions we may encounter areas where instead of appreciation, the market has experienced depreciation and we’ll have to subtract accordingly.
Now, what if the home hasn’t been on the market in a long time so there is no recent sale price? Then we’ll find a recent assessment and use that as a starting point. Obviously, in that case, it becomes more subjective, but that’s why we use more than one method to determine price.
Next I look at the closed comparables and try to find as many as possible going back an appropriate amount of time and try to get them to have as many similar features to the subject home as possible. It’s also important to step out of the box when doing this. So, if there is a nearby town that has similar school district ratings and taxes etc., I also use comps from that town. Why do I do that? Because all things being equal or almost equal, buyers will also consider properties in that town. Those properties are your competitors just as much as the properties in your own town are your competitors.
Finally, I compile the active comps and just like with the closed comps I add the comparable homes from nearby towns, if it is applicable. However, there is one other sector that is often forgotten and that is the For Sale by Owners, the FSBOs. So why should you look at FSBOs for your CMA? Because buyers are looking at them – that’s why. These FSBOs do affect the market, especially in a town where there really isn’t all that much turnover.
Matt Jones then takes adjusted value of the tax records, the average value of the active comparables , the average value of the closed comparable divides it by three and gets the average price.
I prefer to go a step further and, if possible, also add the properties that are under contract. In my humble opinion, these properties are as close to showing the true market prices as possible because it shows at what price buyers are willing to pluck down their money now. OK – it doesn’t show what they paid for the property – that’s not public until after the close – but it shows at what listing prices buyers find properties attractive today! I think that’s very important so I give it a little more weight when calculating the CMA.
After taking the average of the three, the adjusted price, the active comparable and the closed comparable, I add that to the average of the under contract comparables and divide it by two, taking that average. In my opinion, giving the “under contract” comparables a little more weight like this will really get you closer to the right price, especially if there were significant market swings in the market recently.
So is this price set in stone? As a rule of thumb, you can reasonably add and subtract 5% and set that as your reasonable price range. If you want to get a little more precise, one way is to find what is the average discount to the listing price – how much lower than the original listing price the home sold for – and double it. Then use that as your band’s limits above and below the price you set.
If you can find the discount to the original listing prices, then you can also use that as a second band. For example, let’s say that we found out that after calculating our averages we came up with a price of $600,000. Then we found out that the average discount to the asking price for our sold comparables was 2% lower than the last listed price and say 2.7% lower when compared to the price at which the properties were originally listed. We then multiply those numbers by 2 and we get 4% and 5.4% respectively. So, going by that, our reasonable price band should be $576,000 to $624,000 and the second envelope can be $567,600 to $632,000. Where in that band your property will sell depends on a number of factors and especially on how you market it and on whom you chose as your realtor.
Another way to find the reasonable range for the property is to simply add and subtract one standard deviation. Standard deviations are easily calculated using the Standard Deviation formula either in Excel for PCs and Numbers for Apple.
In a market where there is a high turnover rate, I don’t usually pull the tax records unless it’s a very special property that’s very much unlike its peers. Overall, however, if there are a significant number of very similar properties, like for example condominiums in Hoboken NJ or Downtown Jersey City that change hands regularly, you may get away without needing to calculate the adjusted value. On the other hand, it will certainly help to inject much needed objectivity into your Comparative Market Analysis.
So there you have it, this is what I believe to be a more accurate and objective method of doing your Comparative Market Analysis and perhaps not be at the mercy of the subjectivity of your realtor.