There are a number of ways to value your home and several factors to consider. In general, the most important factor is the prices of recent sales in the area. There are three primary tools to consider:

• Comparative Market Analysis
• Seller’s Market Update
• Appraisal

Comparative Market Analysis

Traditionally real estate agents have used a tool called a Comparative Market Analysis, or CMA, to determine a home’s value. This tool has been the cornerstone for most agents. The process is fairly simple. An agent identifies several properties (usually three to five) that are similar to the subject property and that have sold in the recent past. The properties are then compared on a feature by feature basis with the home to be sold (the subject property).  Values are adjusted based on each feature. For example, if a recent sale has a pool but the subject property does not, an adjustment is made based on the relative value of the pool. Once this has been done for each property, the adjusted values are used to determine the value of the subject property, usually by averaging them.

Advantages to a Comparative Market Analysis

The primary advantage to this strategy is that it allows several factors to be taken into consideration. Each feature of the subject property and the comparative properties can be analysed to determine an appropriate adjustment. These adjustments can be large or small and can change based on the type of improvement made to the property. This flexibility allows the CMA to generate a more exact price than other methods.

Another advantage to this tool is that it is typically built into a Multiple Listing Service (MLS). An agent who is a member of an MLS can typically generate at least a basic CMA with a few clicks of a mouse.

Challenges associated with Comparative Market Analysis

There are several difficulties to be addressed. The flexibility that is an advantage to the CMA is certainly its largest challenge. Two agents who conduct a CMA on the same property can be widely different in their results. Part of the difficulty lies in the diligence associated with which items to adjust. One agent may accept the base report as it is generated by the computer while another may spend time analyzing each feature of the various homes. While most people would agree that a pool or upgraded kitchen should be worthy of an adjustment, it is more difficult to discuss smaller items such as quality of the flooring or an over-sized garage.

Beyond determining with items are worthy of an adjustment, another challenge is determining an adjustment value. Many sellers with large upgrades would like to use original cost. However, it is very difficult to consider cost. Certainly not without depreciation being considered. The cost may also be different than replacement value. Ultimately, each item must be considered and valued independently. This could be a very tedious process and highly inaccurate as the value could vary for each individual. It is further compounded as it can be very difficult to compare features of sold properties. We often don’t have access to review them and can determine which features exist based on the data in the MLS or, in some cases, pictures of the home’s features.

Price is often set when the property is contracted through negotiations that occur between the buyer and the seller. After that negotiation, there is an undefined period of time between contract and closing. As the CMA looks back several months to past closings, an adjustment may be required as the market values move higher or lower. Unfortunately, the adjustment can only be made as of the closing date. The amount of the adjustment should be determined by the fluctuation in the value of comparable homes in this market. That number can be difficult to determine.

Each of these items is subject to interpretation by the person conducting the analysis. While the CMA allows the flexibility to hone a more exact price, the interpretation of value, price appreciation (or depreciation) over time, and the level of exactness are subject to individuals and can create vast differences in the subject properties perceived value. However, the largest flaw associated with a CMA is an ignorance of competitive properties. In a market that has declined very rapidly we’ve seen that a review of active properties is absolutely essential to determining price. While only sold property can support the value of a property, those being actively marketed can set a ceiling on the value. Those active properties are competition to the one we’d like to sell and must be considered. If they are priced below the solds and are comparable they will reduce the value of this property. However, a CMA won’t consider them until they are closed.

Summary

The CMA is a very valuable tool that should be performed on each and every property that is being considered for sale. A simple CMA can be conducted in short order and is sufficient to determine an approximate value. Agents should avoid trying to over adjust ad should focus on the larger items that can be more readily compared. Owners should review the CMA and take the adjustments into consideration while also considering other data that is offered.

In a separate post we’ll also review the value of a Seller’s Market Update and Appraisal in determining price.