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When you’re searching for a new home or planning on selling your current one, determining how much to bid or ask can be difficult. Given the many variables that go into assessing a home’s value, it may seem to be somewhat arbitrary. Pricing property is actually a science. It is for this reason that real estate agents perform a comparative market analysis (CMA).
What is a Comparative Market Analysis (CMA)?
A comparative market analysis is a technique used by real estate brokers to estimate the value of a property by comparing it to similar properties that have recently sold in the same region. Since there are so many variables that go into deciding how much a particular property is worth, estimating the fair market value of a home can be extremely difficult.
When people think of factors that influence the price of a home, they usually think of location, square footage, and the number of bedrooms and bathrooms. However, the age, condition, amenities, lot size, and other factors, as well as the state of the local and national markets, have an effect on the value of residential real estate as well.
How Is It Conducted?
Agents perform a CMA study by looking for recently sold homes in the same region that are as close, in terms of location, as possible to the subject house.
These houses, also known as comps or comparative sales, are used to price a house using a sales comparison strategy. This method is based on the idea that you can find out how much a home is worth by calculating how much a comparable home of equivalent desirability will cost.
The Power of Three
Finding three homes that have recently sold is the first step for an agent planning a CMA (within the past 6 months at most, but preferably 3 months). All three houses should be as identical as possible and be as close as possible to one another.
After at least three comparable homes have been chosen, each is carefully analyzed to determine how it varies from the home in question. Following the itemization of the differences, the purchase price of each comparable property is adjusted to calculate how much it would cost if it were virtually equivalent to the subject property and sold in today’s market.
While a comparative market analysis compares and identifies regional home values using common housing market metrics, it is not considered an official home valuation. CMAs are performed by licensed real estate agents to estimate the fair market value, while home appraisals are done by appraisers to produce home valuations.
A CMA is a complex process that requires technical knowledge of the overall market and how various aspects of real estate influence how much a property is worth. Even though the resulting value is an estimate that often incorporates the goals of the seller or buyer of the property, it is a complex process that requires technical knowledge of the overall market and how various aspects of real estate impact how much a property is worth.
Considering the Market Conditions
When it comes to comparative market research and price setting in general, market dynamics are a wild card. That’s why it’s best to use homes that have sold within the last few months of the one being priced. CMA values can be thrown off by a powerful buyer’s or seller’s market.
A rapidly gentrifying area, for example, could lack good comparables because home prices can fluctuate drastically in a matter of months. If you’re searching for a home in a rapidly appreciating area, keep in mind that, even if buyers and sellers settle on a price, an appraisal would be required to decide if the price is justified in order to obtain financing.
How is a CMA Calculated?
While conducting a comparative market analysis is a complex undertaking, it is divided into manageable chunks. These components work together to provide sellers and buyers with a comprehensive value estimate.
Agents begin by compiling a list of at least three related properties that have sold in the same region in the last three to six months. Agents may choose properties that are currently listed on the market or pending if there isn’t enough sales data or if the potential purchase price of a home is being measured. Even expired listings may be used to show the types of prices that are too high to entice potential buyers.
The following is a list of the different elements that make up a CMA:
The best comparable properties would be in the same neighborhood as the subject property. If there aren’t enough recent sales in the region to fill out the CMA, the agent will choose comps from a comparable area based on the quality of local schools, crime rate, noise level, proximity to facilities, and other factors.
A property’s lot size has a major impact on its market value. Even a half-acre difference can have a significant effect on a home’s price.
The more square footage a house has, the more valuable it is. As a result, the amount of livable square footage in a home can be just as significant as the number of spaces.
Property age, condition and features
The value of a home is determined by the year it was constructed and if it has recently been renovated. Newer constructions and homes constructed with high-end materials are also regarded as more expensive, though historical homes that have recently been renovated may also command high prices.
The number of bedrooms and bathrooms in a house determines its value. The more bedrooms and bathrooms a home has, often the higher its value (although that’s not always the case.)
Special features such as fireplaces, patios, swimming pools, garages, completed basements, and other similar features are also taken into account. It’s important to remember, however, that depending on the local market, not all unique features would be seen as adding value to the house.
Date of sale
The comps should have sold within the last three to six months. If the selling dates aren’t up to date, the rates must be updated to reflect the changes in the market. Depending on the size of inventory and changing interest rates, market conditions can fluctuate locally or nationally.
Financing and selling terms
The form of financing a buyer uses to purchase a property, as well as the terms of the deal, may have an effect on the purchase price. Buyer contingencies should be considered if the bid price is higher. If a comparable transaction contained seller concessions, the concessions’ worth must be deducted from the purchase price.
The seller’s decision to pay the buyer’s closing costs or make renovations to the home prior to selling are examples of such compromises.
Interested in finding out what your Waterloo Region home is worth? Contact the experts at Team Pinto now.