I think it is safe to say that no investor or potential buyer should EVER go into a sale without having performed their due diligence. One part of this process is the Comparative Marketing Analysis, CMA. This is NOT something to haphazardly do by ones self online with Zillow or some other “free” site. I personally would not even pay for this service online. You want a professional to do your CMA, and you want a professional who is local to the area you are working in and one who is personally knowledgeable about the actual neighboorhood if possible.
Typically a CMA is performed by a real estate agent or an appraiser.
Although reports can vary, from a two-page list of comparable home sales to a 50-page comprehensive guide, the length and complexity of the report depends on the agent’s or appraiser’s business practice. However, standard comparative market analysis reports contain the following data:
- Active Listings
Active listings are homes currently for sale. These listings matter only to the extent that they are your competition for buyers. They are not indicative of market value because sellers can ask whatever they want for their home. It doesn’t mean any of the prices are realistic. The offered sales prices do not reflect market value until they sell, and in buyer’s markets, like we have today, most sell for a lot less.
- Pending Listings
Pending sale homes are formerly active listings that are under contract. They have not yet closed, so they are not yet a comparable sale. Unless the listing agent is willing to share information about the pending sale — and probably won’t — you will not know the actual sold price until the transaction closes. However, pending sales do indicate the general direction the market is moving. If your home is priced above the list price of these pending sales, you could face longer DOM (days on the Market). Remember that this only matter if you are trying got sell your home through a realtor. The way I teach you, you will only be using realtors for a very small percentage of your business.
- Sold Listings
Homes that have closed within the past six months are your comparable sales. These are the sales an appraiser will use when appraising your home for the buyer, along with the pending sales (which will likely have closed by the time your home is sold). Look long and hard at the comparable sales because those are your market value.
- Off-Market / Withdrawn / Canceled
These are properties that were taken off the market for a variety of reasons. Usually the reason homes are removed from the market is because the prices were too high. The median prices of this group will almost always be higher than the median prices of comparable sales. These are absolutely useless to your buying or selling of a home and for your purposes as an investor should not even be on the CMA, but don’t stop your agent from putting them there, they are a source of leads for you to go and try to negotiate with the owner without the extra fees of a realtor. More on that later.
- Expired Listings
This group will reflect the highest median sales price because they did not sell and were probably unreasonably priced. Some of the expired listings could also show up as an active listing, listed by a new agent at a new price. Listings also expire because they were not aggressively marketed or because the home was in need of repairs. This too as an awesome way to get leads, so don’t have your realtor remove it from the list, just don’t count it in your calculations for the worth of the subject house
Examining Comparable Sales
Comparable sales are those that most closely resemble your home. It is impossible to compare a tri-level home to a single-story home. A 2 bedroom 1 bath house is in no way comparable to a three bedroom two bath house and I don’t care if they are on the same block and built by the same builder. Select the homes from this list that are mostly identical to your home in size, shape and condition, such as:
- Similar square footage
Appraisers compare homes based on square footage. Larger square-foot homes are worth less per square foot than smaller square-foot homes. The variance among a group of median-priced homes ideally should not exceed more than 200 to 400 square feet, plus or minus. This is perhaps the biggest area where people get into trouble. It isn’t just about square footage price, it is about square footage in THAT neighborhood. This calls for a story.
I have an investor friend who was having a problem with comps (another word we use for the “comparable houses”) for a given area where he was planning to buy a home to do a rehab and then sell to an end user. A retail sell. The problem was, that this house was built on a hill and at some earlier point the owner had finished out the basement. This made a 2500 square foot house into a 3500 square foot house. The problem was, there were no 3500 square foot homes in the area; the house was unique t the neighborhood. He mistakenly used the average square footage price for the neighborhood based on his CMA and calculated the worth of the home he was buying. Here is where he learned his first big lesson in real estate. A home That is nearly 50% larger than every house in the area is NOT going to sell for 50% more money! By the time it was over, he took about an 18,000 waxing and was happy to only lose that much.
- Similar age of construction
Ideally, the age of the home — the year it was built — should be within a few years of other comparable sold homes. Mixed-age subdivisions are common. For example, in one area of Sacramento, a subdivision consists of homes built in the 1950s, and then they jump a couple decades to the 1970s. Although the homes are located next door to each other, the homes loaded with character from the 1950s sell for more than their newer Brady Bunch counterparts. If your home was built in 1980, say, and brand new homes up the street are selling for more, you cannot command the same price as a new home. By the same token, the houses “with personality” as mentioned earlier, might be smaller, but will almost always sell for more money than the larger “cookie cutter” types
- Similar amenities, upgrades and condition
Appraisers will deduct value from your home if other homes have upgrades and yours does not. A home with a swimming pool will have a different value than a home without a pool. But pay attention! In your more well to do neighborhoods a pool is an asset, in a poorer neighborhood they become a liability. In California or Nevada wher it is warm most of the year a pool may help sell a house; whereas in New York or Michigan, it may make it very hard to sell; unless of course you can get it to double as a skating rink…(okay just joking). A completely remodeled home is worth more than a fixer. Homes with one bath are almost always worth less than homes with two or more baths. Deferred maintenance will count against you. Every time and in every area of the country.
- Location
Everybody knows that real estate is valued on “location, location, location,” but have you considered what that means? A home with a view of the city, for example, is worth more than a home facing a cement wall. Homes located on busy thoroughfares are worth considerably less than homes on quiet streets, particularly cul-de-sacs. Compare your home to those in similar locations. If your home sits across the street from a power plant, look for other homes with power plant exposure or those located along railroad tracks, among other undesirable locations.
You can view this and other articles at:
www.REINetUSA.com
