Real Estate CMA Confidential

I was talking with a potential client yesterday and happened to mention "CMA" in my conversation. The client said "What is a CMA?". So often in the Real Estate business, we get so used to using jargon that we forget not everyone "speaks the same language". It was obvious the client was somewhat hesitant to ask because I had used the term so casually as if I expected her to understand what it is.

When considering a Real Estate transaction, don't ever hesitate to ask your agent (or potential agent) the meanings of acronyms or terms with which you may not be familiar. It is much too important to allow pride on your part, or hubris on the agent's part, to stand in the way of complete understanding of what you are doing.

To get to the CMA itself, a CMA is a Competitive Market Analysis. It is used to determine the approximate market value of a home. They are used by selling agents to help set a price for sale. They are often used by Buyer's agents to help to determine what a fair offer ought to be.

The way a CMA is created is that an agent will look up on the MLS, homes that have sold in the same area and that are similar in style to the "Subject Property" or the property whose value is being determined.

By reviewing other properties in the same area, and by choosing properties that have Sold, recently Listed, are Pending, have Expired or have been Withdrawn, within a relatively recent time period, one can get a fairly accurate market value of a home.

It is always best to consider current market trends as well as the "raw numbers" for those categories mentioned above. e.g., if the market has been trending down as has been the case over this last year, the agent's recommendation of market value should be toward the lower end of the price range of the CMA.

Note that a CMA does not state that there is a single dollar amount associated with a home. In fact a price range is described along with a "Recommended Amount". A CMA is a snapshot of value at a moment in time. It is the approximate value of a home "on that particular day." Home values can change quickly depending upon circumstance.

A good agent will "adjust" their CMA's. That is, when comparing two, three or more houses with the subject property, adjustments have to be made to make them "equal" with one another to determine what a house similar to the subject would be worth.

For example if the subject has 3 bedrooms and the comparable property has 4 bedrooms, then an adjustment has to be made. Generally, a bedroom's MARKET VALUE is estimated to be worth between $2500 and $5000. Yes, it costs more than that to add a bedroom to a home, but the market value of a bedroom falls within this range in most of Lancaster County, PA. The cost of the bedroom is SUBTRACTED from the comparable's price because we are trying to make all properties similar to each other in value given the features and their costs.

Further adjustments are made for such things as central air, style of home, sq. footage - both above and below grade, number of bathrooms, number of bedrooms, garages, etc. to come up with a price range of similarly featured homes.

The closer the comparables are to the subject physically, the better for accuracy. This helps to reflect the desirability of the school district, the neighborhood, the access to shopping, churches, etc. It helps to reflect what the "market" is willing to pay for this location.

Comparables should be relatively contemporaneous, as well. Pulling up a comparable property that sold 2 years ago is usually of little use, just because markets can change so significantly in relatively short times.

If a home is in a development or in a relatively homogeneous neighborhood, I try to use a couple of rules of thumb for doing CMA's. One is I attempt to find comparables within 1/4 to 1 mile of the subject. Secondly, I use comparables whose status has been established or changed within the last 6 months - or a shorter time whenver possible.

There is still a fair amount of subjective judgment used to create a CMA, so they may vary in recommended prices or price ranges for the same home.

A CMA is NOT an appraisal! Most CMA's prepared by Real Estate Agents have a disclosure on them somewhere that says something to the affect of "This CMA is not an appraisal. Appraisals are done only by certified appraisers. A CMA is used to determine the approximate value of a property."

Because I specialize in Vintage and Premium Homes, which are often one of a kind, I often have to ignore my own "rules of thumb" for doing a CMA. For example, if I am attempting to determine the value of an 1869 Gothic Victorian, it is unlikely that I will find comparables within 1/4 of a mile - so I have to go further out for comparables. Sometimes as many as 25 miles!

Likewise, if I am doing a CMA on an architecturally designed custom Premium Home, I may have to go back further than 6 months to find a "comparable" that has sold.

In any case, if an agent follows some basic rules, puts in a good deal of time and research, and uses some common sense, he/she should be able to come up with a fairly accurate range of the market value of a particular property.

We will talk about the value "ranges" mentioned in CMA's and how to use them to your advantage, in an upcoming post.

Feel free to send me your comments, questions and concerns.