What should be in a Comparative Market Analysis and how long will it be accurate?
Denver, Denver Real Estate, FSBO, Marketing, Realtor, statistics Add commentsWhat should be in a comparative market analysis (CMA)? A CMA shouldn’t be just a list of solds or actives. It should reflect the current conditions of the market. I was recently asked how long I felt a CMA was accurate and personally, in this market, I don’t think I would want to blindly price a home off a CMA I completed even two months ago. In most cases, my paranoia leads me to double-check solds and similar active listings even an hour before driving over to take a listing. There is a huge disparity in home pricing mainly because brokers use a wide range of largely ineffective models to determine pricing.
What I would look for in a Comparative Market Analysis (CMA).
- New Sold Comps - This one is obvious but probably one of the most overrated when it comes to pricing. I don’t think this is the most important factor in pricing, but it’s important because once buyers have found that they liked your home more than the competition, this is where they will look to see if you’re worth it. You don’t have to be priced less if you can justify it, but both the initial offer and the appraisal will be based on this. Because of this, and to make sure you will appeal to the buyers in the market, you need to be priced in the ballpark that your buyer is looking in. Be prepared with a list of sold comparable homes and a justification of the price based on the homes’ differences. Sold data will likely not show a significant change over a short time frame and usually one low or high sale isn’t enough to support pricing.
- New Competition - How many similar homes are you competing against? What does it cost to buy the other home? How do you compare to what is currently for sale? Lots of competition? It can have a huge effect on time on market and how much you’ll get for your home. If another seller comes on the market and prices below your home it will reduce your ability to compete at a higher price. Unless, of course, your home is truly different in a substantial way, this is not very likely when your home was a new construction home in a subdivision full of homes just like yours. How you compare to other homes that your potential buyers will be looking at is the most important factor in determining price.
- Changing Absorption rates - This is a measure of how long the current inventory would take to sell if no new homes were added to the mix. Demand varies seasonally and as the result of the weather (super obvious) and the school year, as well as economic pressures and even poor media coverage of the market. Supply also varies greatly, peaking in the summer in most cities. It’s a great indicator, especially when applied directly to the homes of similar type.
- Change in Days on Market before a sale - It’s also much easier for most people to grasp when compared to other indicators, but it’s one of those pieces of information that gets abused. Unfortunately, just because something sells quickly doesn’t mean it was under-priced. It could have just been the best home that the buyer was able to get an offer accepted on when they were looking. (see #2) There are too many variables to use the fast sale of a recently-sold property to support the idea that your home should sell for more. I find that of the homes that sell quickly, they usually don’t sell to some new buyer that just wandered by. Most new listings sell quickly when they are priced right when compared to what’s available. Buyers usually look around before they’re ready to buy. The homes that sell quickly likely sold to someone who was looking for a while already and recognized that the home was priced appropriately.
What is most disturbing though is the vast majority of sellers already have a price in their head that they want. Of course, I’m usually willing to hear why the seller thinks his home is worth the pie-in-the-sky price. They are usually trying to compare their home to homes with extra bathrooms, a finished basement, or more square footage. Even worse, many work backwards from how much they want to walk away from the closing table with or what they owe to arrive at their number.
For me though, I believe that the CMA’s should give you a range of what pricing will be acceptable to the market. It should also indicate where offers are being accepted when compared to the list price and what concessions (if any) are common. For Denver, as a general rule, most Denver homes homes sell within 2-3% of their current list price and buyers get less than 1% in concessions. Most also sell within 10% of their original list price of the current listing period. That means most homes priced more than 10% higher than what comparable homes would sell for usually end up expiring without a sale. In case you missed it, most Denver Homes are overpriced on average of 20% when compared to the average list price of the solds.
In the end, it comes down to the feeling you get walking in the door. The same feeling the buyer will get. Look at the competition and know what price can be justified. That’s the only way you can nail down the real value.
Also see: How to sell your home quickly for top dollar.
Technorati Tags: Denver, Real, Estate, CMA, Selling_A_Home, Pricing
January 24th, 2007 at 6:05 pm
Good points made here, I agree with much of what you are saying in the fact that the Denver market is similar to most markets in the Midwest and homeowners are universal in mentality. I like to communicate to real estate sales professionals that it may be to their advantage to order an appraisal in the early part of the listing relationship.
In situations where the homeowner feels that they know what the property will sell for, an appraisal can be used to educate the client while preserving the relationship should the broker or agent have a different idea in listing amount. By ordering an appraisal the sales broker or agent now has a tool to communicate to the property owner based on an unbiased third party aspects to the current market.
Requesting an appraisal up front in the listing process also shows the homeowner and future client that, this sales professional offers service and will do what they need to in order to sell the property.
An appraisal will give the agent better ability to commit the listing and reduce the tire kickers that consume a large part of broker’s and agent’s time. Those who are serious about selling their property will be willing to incorporate methods and tools to do the job even if there is a minor cost involved.
Meanwhile an appraisal gives the listing agent a base to work with in keeping the listing and limiting the risk of the listing going to a competitor who may us a promise and list high sell low tactic to gain listings.
There are other advantages in ordering an appraisal upfront also. Most see this tool as an unnecessary cost when it may be better to set the mind frame of a appraisal or even home inspection as a cost of the doing business / operational cost. Besides there are many ways to deal with cost of real estate services businesses when in a supportive role. Other issues that sales professionals will list are the loss of commission by an appraiser coming in low, but with the other option being an over priced listing of 10 percent to 20 percent, how much commission is made on a doomed listing where the price was set to satisfy a homeowner or to gain the listing in the first place. Last but not least the real estate sales professional needs to order a Listing Appraisal and clear the thought of appraisers being low because they only do Refinance Appraisals.
January 24th, 2007 at 9:54 pm
Shane, the problem is, Realtors don’t NEED an appraisal when taking a listing. I have access to the same information that you do except deep down, I think pricing is more about the feeling a buyer gets walking in than analyzing the cold numbers of sold listings.
What would help is a preliminary price range summary supported by data, not a full appraisal but a simplified second opinion of price. It would accomplish what you’re saying and still appeal to the average agent and client. The problem is the cost of the appraisal. There is no middle ground product, I just need a price range not full on value target. I guess I’d look into introducing a new product line to fill the void.
January 26th, 2007 at 7:45 am
[...] Spencer Barron writes an excellent piece on comparative market analysis for individual homes. What makes it such a good piece is how he breaks down what should be considered in the estimate and why. [...]