If you’re a fan of HGTV’s Property Brothers, you may wonder how realtor Drew Scott can travel around Canada and the US confidently telling sellers and buyers what homes – theirs or others – will sell for. After all, real estate markets are highly localized, not only from city to city but from neighborhood to neighborhood. How does Scott wrap his head around so many of them?
The answer in three words is comparative market analysis (CMA).
Whether you’re considering putting your home up for sale or making an offer on someone else’s, a CMA enables you to estimate its fair market value. Using data and digital applications from the local multiple listing service, your realtor can make side-by-side comparisons with homes that:
- Closely resemble the property in question in size, features and quality;
- Are located in the same area; and
- Have sold recently, are pending, or currently on the market.
Dollar adjustments up or down are made to comparable properties (or “comps”) depending on how they differ from the subject property. For example:
- Do they have more or less square footage?
- Are they older or newer?
- Have they been updated or remodeled?
And so on. Then the adjusted values of comps are averaged to estimate the fair market value of the subject property.
A CMA is both science and art. On one hand, the math and some selection principles are objective. For example, recently sold homes take priority over other types of comps. Since their sale prices are unknown, pending and active listings play a limited or supporting role in the process. And distressed homes should not be included. Fair market value assumes that both buyer and seller are knowledgeable, willing and unpressured. In a short sale or the sale of a foreclosed property, the seller doesn’t match that description.
On the other hand, a realtor’s intuition and local market knowledge also influence the selection of comps and the adjustment of their prices. It’s impossible to assign an objective dollar value to a view, a fireplace or a pool, for example. A realtor can look to appraisers for help, but there’s always an element of by-guess-and-by-gosh in the process.
That said, CMAs are an indispensable tool in buying or selling a home. They not only help you to get or pay a fair price, but also save time and stress. If you list your home at a fair price, you’re almost guaranteed to sell it faster (and for more money!) than if you ask too much. And if you’re confident in the value of a home that you want to buy or sell, you can approach negotiations with greater strength and peace of mind.