Comparative Market Analysis (CMA) Guide for Beginners (VIDEO)
Comparative Market Analysis or CMA’s are often utilized by investors to get an idea of what their investment will be worth after their proposed scope of work is completed. CMAs should be an important tool in making smart investment decisions. Too often there isn’t enough thought and attention put into them and appraisals come back significantly different from the results of an agent or investor-produced CMA. Here are some of the most frequent pitfalls that pop up in those CMAs.
The Location Plays a Big Part
This is more than just a property being on a golf course. Location is a culmination of all the geographical, social, governmental, and economic influences that are important to homebuyers. Typically this is reflected in things like crime rates, school districts, and what sort of home your neighbor keeps. Keep comps within the neighborhood boundaries.
Avoid crossing major streets, avoid using distance as the only locational search parameter and avoid going into other school districts. If you don’t know the neighborhood you’re in, or worse if your agent doesn’t, then you’re already at a disadvantage. If the comps that have been picked for the CMA don’t appear to be in the subject’s neighborhood then it’s time to talk to an appraiser or get a second opinion from an agent outside the transaction.
Know the expectations of buyers in the area and that area’s pricing limits. Over-improving for most areas is risky. Building a mansion in a low-income area doesn’t mean you’ve changed the neighborhood. It just means you’ve built something that probably doesn’t belong. This doesn’t mean that it can’t be sold, that is exactly how neighborhoods are changed and revitalized. But being the first to do this in an area is the exception, not the expectation.
This is a risk, which isn’t often going to find benefit in the context of an appraisal. Neighborhoods establish value caps naturally. When a buyer has purchasing power over that cap new neighborhoods and options open up for that buyer. Ones that often move them out of the original neighborhood.
The Subject and the Comparable
Pick properties for the CMA that is actually comparable to the subject. If the investment is a rancher with 1,000 SQFT above ground with a 1,000 SQFT fully finished basement then search for ranchers with at least marginally similar SQFT distribution (same sized upstairs, same sized finished basement). It’s acceptable to go a little bigger on one and a little smaller on the other but in general. Try to keep as many factors as you can the same between the properties. Avoid using 2 story homes when evaluating ranch-style properties.
Avoid using properties with basements when the subject doesn’t have one and so on. This means spending time looking at the comps that are used. It’s easy to pull all 2000 SQFT homes within a 1-mile radius of the subject that sold in the past 6 months and averaging the results. This is easy, quick, and almost completely useless. Review the search results and weed out what isn’t representative of the subject.
Don’t assume that the subject remodel is going to be the same level as the top end of the spectrum for the area, often they aren’t, so don’t’ just pick the highest comps and run with them.
Watch for anomalies if something appears out of line with the rest of the CMA results be sure to question it. Make a few phone calls to the agents to ensure it isn’t a special situation. On a recent appraisal, I performed for an investor they were basing the majority of their valuation on a property that sold 30-40k higher than any other viable comparable in the area.
After calling the listing agent I discovered that the property was basically a custom remodel for the purchaser. Not a normal market exposure transaction, and was a definite over-improvement for the area. It was not representative of what the investor was going to be doing with their property.
Determine the Investment Value
Do not use purchase + rehab + profit to determine the investment’s value. It can be a deciding factor on whether or not to move forward with a property but the most important thing that matters in resale valuation is what the market is willing to bear not if too little or too much money was spent on remodeling.
CMAs usually don’t convert prices to ‘as cash’ values. If a property sells for $185k and it has $5k in concessions then it’s the same as $180k cash value. Concessions exist in almost all marketplaces and are usually adjusted for by appraisers.
Do not use $/SQFT. $/SQFT is an awful valuation method. There are several reasons why it’s bad, here are the top two. #1 $/SQFT inadvertently includes major elements that aren’t related to the SQFT of a property, this includes but is not limited to lot size, views, garage spaces, etc. #2 $/SQFT is naturally subject to diminishing returns. This is primarily due to the distribution of fixed value items over an increasing denominator. For example, the $/SQFT of a 4,000 SQFT home is going to be much less than the $/SQFT of a 2,000 SQFT home on the same lot with all of the exact same amenities. This is simply the tendency of neighborhoods and a function of math.