CMA for Real Estate: How Effective Is It?
What is a real estate CMA?
- By definition, CMA means a short term for comparative market analysis. It is a free tool widely used by realtors to provide home pricing information for sellers to decide the listing price or for buyers to place an offer price.
- CMA for real estate is not a formal appraisal but an opinion of the value of a property by realtors based on an analysis of a number of factors.
Why use a direct comparison approach?
- When estimating a home value, there are a few approaches such as cost approach, income approach, direct comparison approach, etc.
- Among those approaches, the direct comparison approach is more practical and effective to estimate a home value if comparable properties are available.
- Therefore this approach is widely used in the residential market in Ontario. The court also makes judgments on this approach. Real estate CMA comes out of this approach principle.
How to get a comparative market analysis?
- To select the right comparable properties, you need to consider the timing and market conditions of those comparable homes.
- For example, the closer the sold time of the selected property to the evaluation date, the closer the location of the comparable properties, the closer in physical similarity, the more effective this analysis is.
- In addition, the comparable properties should be a regular transaction to reflect the true market value at the time of transaction without any other interference such as the transaction between family members or other special situations.
- Some realtors may use a template to do a real estate CMA and may even generate a CMA report during a presentation for the home seller. The major factors are the same items mentioned above.
How does real estate CMA work?
Once those comparable properties are selected, realtors analyze that information and make necessary adjustments based on the factors such as time, location, lot size, home conditions, market time, market past and current trends, any major upgrades, etc. Then the realtor arrives at a recommendation to the seller or buyer.
CMA vs offer and listing price
Both sellers and buyers' agents have similar training and follow the same method. Their price recommendation for a listing or an offer may fall into a reasonable range, which makes a good anchor number for both parties.
However, there are exceptions.
- You may notice that a listing price is noticeably lower than that of the comparables, which may be the seller’s underpricing strategy to entice a bidding war.
- Sometimes, the seller may have an exceptionally overpriced target for their property, which may result in longer days on the market and a possible deduction later on.
- The homebuyer may also intend to offer a much lower price than the comparable one, which could be interpreted as a lack of serious interest in that property in the seller or seller agent’s view.
CMA for real estate is only a tool to estimate a home value fairly and currently. If the market situation changes dramatically in a very short period, or the comparables are no longer appealing, its effectiveness will be discounted.