How Does Comparative Market Analysis Work?

Via LearnVest By Brentt Taylor ~

Knowing what a home is worth is a big challenge for both sellers and buyers. How much should you charge? How much should you pay? How do you know?

A Comparative Market Analysis (CMA) can help. It’s an evaluation of the listing and sales prices of similar houses in the same area. A CMA is useful for both those wishing to buy a home, as well as for those looking to sell their current property.

A CMA is different from an appraisal, which is a comprehensive evaluation of a property that’s performed by an independent professional appraiser and used to qualify the home for a mortgage. A CMA is used to make an appraisal, but it’s only part of the process.

A CMA is based on an agent’s knowledge of the area where a home is located. If the agent is experienced and has knowledge of the local market, the CMA should come in very close to the appraised value.

The Purpose of a CMA

While sellers use the CMA information to decide the price range for their home, buyers use CMA information to determine a price that’s fair for a property. On the other hand, real estate agents and appraisers use CMA information to decide the market value of a property.

When homeowners want to refinance their mortgage or take out a second mortgage, a CMA will be done to determine if the value of the house is high enough to refinance at the current mortgage balance. The homeowner may also use a CMA to see if the value of the house has gone up and increased enough in equity in order to take cash out of the house or apply for an equity loan.

It is important to fix the right price for a house. If it’s too low, the seller will lose money. If the price is too high, the property may not sell.

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How to Choose Agents for Your CMA

Sellers should ask at least three real estate agents to conduct CMAs on their house. Opt to select agents who have sold a lot of houses in the vicinity or with whom your neighbors have had success. A good agent should be able to give you a rough estimate of what houses sell for per square foot in the area.

Another tip: Don’t tell agents what you think your house is worth, what you paid for it or the balance left on your current mortgage. Let them give you an unbiased opinion of the property’s value. And if the results vary, try to seek out a couple more agents in order to balance the possible outcome of the CMA. An agent will usually do a CMA for free.

How a CMA Is Prepared

The information needed to create a CMA is usually obtained from public records in the county where the property is located. The Multiple Listing System (MLS), a computerized listing system where real estate agents list properties for sale and search for required properties for clients, is another source of information for a CMA.

Usually, an agent will use three comparable properties that are located within a mile of the given property to conduct a CMA. It’s sometimes recommended to use six comparable properties–three that are currently for sale, and three that have sold in the previous three to six months. Each one is the same type of property, be it a duplex, a single family home or a condominium. If you live in an area where the real estate market is relatively sluggish, the agent may have to use similar neighborhoods in your city to develop the analysis.

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