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• Competitive Market Analysis (CMA):  usually performed by a real estate agent for either a buyer or seller. This approach compares the price of the subject property with recent sales of similar homes.
• Appraisal:  a more detailed method employed by a professional appraiser. In most states an appraiser must be licensed. Carries more legal weight than a CMA.

Introduction

A Competitive Market Analysis is (or should be) free. A professional appraiser will cost around $300 (for higher valued homes or unique properties, the cost will be more). When a home is sold, both the CMA and appraising methods are usually applied - one before the house goes on the market and before offers are made - one after the house is sold.

The seller will call an agent (or a few agents) to get an idea about the value of the home. Agents will arrive at the listing appointment with a CMA in hand to help the seller arrive at a list price. When potential buyers look at the property, their agents should also calculate a CMA. 

When the home is sold, the lending institution will insist that an appraiser be hired.  If the findings do not meet (or exceed) the offer price, there is a problem.  Lenders will base their loan amount on whichever is lower, the sales price or the appraised value.  Sometimes buyers are willing to pay more than the home is worth but lenders will still base their loan amount on the appraised value.  The buyer would have to come up with additional cash to pay the difference.

Overpriced Homes

In the real world many homes are overpriced. If all listing agents prepare a CMA for their clients, how is this possible? Either the seller is not listening to their agent or the agent’s CMA is wrong. Right? Well... if you interviewed three agents to list your home and their CMAs ranged from $145,000 to $160,000 wouldn’t you be inclined to list your home with the $160k company?

Listing agents know this and that’s why some of them tend to inflate prices.  This is a questionable sales tactic called "buying a listing."

Sellers are not totally innocent, either.  John Q. Seller knows for a fact that the Smith home down the street was llisted for $175k three months ago and that house wasn’t as nice as his.  He conveniently forgets that the home was on the market for over a year at $175k and finally sold for $143k with the sellers carrying back a second mortgage for $20,000. The Smiths had recently re-carpeted the entire house and remodeled their kitchen.

The MIOP approach to value

Many sellers use the MIOP approach to home value. That’s "Money I Owe People."  The seller in this case has refinanced the home for 125% of its value to pay off credit card balances and then turned around and run up the credit cards again.  Rather than curb his spending habits, he has decided to sell his home. 

For example, the seller paid $140,000 for a home one year ago.  He put three percent down and included all his closing costs in the mortgage, then refinanced 6 months later and included that lender’s charges... get the picture? He now owes more that the house is worth and is in serious debt. 

In this situation it is impossible for the seller to look at home value in any sort of rational way. Desperation has taken hold. There probably isn’t any reason to look at his home because he can’t lower the price. Even if an unsuspecting buyer offers him the list price, the whole deal will fall apart when a professional appraiser inspects the home.

Competitive Market Analysis

The aim of a Competitive Market Analysis (CMA) is to find similar homes that have sold within the past six months. The more homes sold, the more valid the CMA.  In Las Vegas, for example, most homes were built in tracts, so there are many similar homes in the immediate neighborhood. 

A typical new home tract will contain four models and every home in that tract will be one of those styles. So finding a comparable property is relatively easy. Ideally, the home will be identical to the subject property. 

In actual fact, homes are not identical.  Even if an agent found two identical properties, the one closest to the center of the tract would be more valuable than one on the edge of the tract that may back to a busy street. 

CMA's in Older Neighborhoods

Lets say you live in a 35-year-old neighborhood. Even though there were only two basic models sold in y our tract, the area doesn’t have that “cookie cutter” appearance anymore.  Over the years, folks have remodeled, landscaped and decorated these homes so that each has a rather unique appearance. For example, your next-door neighbor may have added a second story, a family room, an additional bedroom or bathroom.

In general, older homes are more difficult to compare.

If we find a few similar properties that have sold within the past 6 months, the agent's job is easy.  If not, they have to expand the criteria either by searching through neighboring tracts or by going back further than 6 months. When looking at older sales, the agent has to keep in mind how much homes have appreciated locally.

Tax Records

In most counties, the Assessor’s Office contains essential information about every piece of property in the county. You may search through these records yourself online. Once your home is listed, ask your agent to give you a copy of the MLS Listing form.  Check it against the information in the tax records. If there is a discrepancy and you don't know of any remodeling to account for the differences, assume that the tax records are accurate and ask your agent for clarification.

Pools and Spas

So, you just spent $25,000 putting in a new pool.  Some people even spend up to $200,000 on pools. Don’t expect to get your money back anytime soon. The sad news is that pools and spas will add only a marginal increase in value.  The average pool only adds between $5,000 to $7,500 to the value of a home. The same is true of many other upgrades and additions. While they might make the home more appealing, they do not necessarily add much to the value of the home.

As a buyer, are you better off looking for a home with a pool or having one installed yourself? 

With older homes, pools are usually a bargain.  You will not pay much more for an older home with a pool than one without.  On the other hand, the seller of a newer home remembers exactly how much he paid for the pool and wants to recoup his money. As a matter of fact, he financed the pool and still owes $25,000. When he sees how little the appraiser adds for the value of the pool, the seller may be in for a huge shock. 

Note:  You will notice that ads describing pools usually refer to them as "sparkling" or some other brilliant adjective. Sparkling pools do not appraise any higher than normal ones (humor).

A Sample CMA 

The Professional Appraisal

Appraisers use three methods of determining value; the sales comparison approach (very much like a CMA), the Cost approach (what it would cost to replace the home) and the income approach (used to appraise commercial rental properties).  The Sales Comparison approach is most appropriate and most reliable for residential real estate. 

Different types of loans may require a special type of procedure. For example, FHA and VA loans require that the appraiser be "approved" by them, that certain forms are used, and that certain conditions are met. 

The seller and his agent wants to get the highest price while the buyer and his agent have offered a certain price and are hoping that the appraiser will support that price. Even the lender is hoping that the deal will go through. After all, he doesn’t make any money if there is no sale. 

The appraiser is working for a flat fee and has no vested interest in the deal. He will be paid regardless of the outcome of the appraisal.

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