Tuesday, June 17, 2014

Pricing: The Comparative Market Analysis

By Evan-Amos (Own work) [Public domain], via Wikimedia Commons

If you talk shop with realtors all the time, you have probably heard the term "CMA." If you're a normal, healthy person, you probably haven't.

CMA means "Comparative Market Analysis," and it gets into the somewhat-murky waters of How Housing Prices Work. Let me explain:

Ultimately, your house is worth what someone is willing to pay you for it. A standard purchase contract allows you protections, including making sure that a professional appraiser agrees that it's a fair price, but in the end, there might be someone out there who is willing to pay you one million dollars for your 1200 square foot three bedroom house. (Full disclosure: There probably isn't, though.)

When you and your listing agent (me) sit down together to price your house, you're going to want to do a CMA for it, though, which is essentially a very educated guess at what someone would be willing to pay for your house, based on what people have been willing to pay for houses like yours recently.

If your realtor is good, they are going to have working knowledge of price levels in your area, and be able to determine where, geographically speaking, price jumps or dives happen around your house. They will access the Multiple Listing Service which, for realtors, has a massive collection of most house sale data from the past several years. They will take sales data from the past three months on homes that are similar to yours, and then run that data through an algorithm that adjusts for difference in square footage, number of beds/baths, garage, and so on. (Note: Three months is pretty standard, but in particularly slow areas, I've had to look at four months of data for reasonable comparisons, and I've done a CMA for an area where one week of data was plenty to get good comparisons. It depends on how fast homes are moving in your neighborhood, really.) When I prepare market analyses for clients, I also take into account similar houses that are currently for sale (the competition), houses that are under contract (prices that probably worked), and houses that have expired from their listing without being sold (prices that probably didn't work).

The point is, house pricing is not an exact science. There are powerful tools available that help us make very good estimates, but in the end, that's what they are-- estimates.

So, I'm guessing that two questions have occurred to you while reading this:

1. What's my house worth?
 -Glad you asked. I've built a form that will let you submit a CMA request to me. For reasons that should be apparent from the explanation above, CMAs are not (and shouldn't be) automated. I will happily give you a price estimate for your home with no obligation to you.

2. How do I increase my home's worth?
 -This is an excellent question, and its answer is deserving of its own post, so it will get one soon.

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