The Art of the Residential CMA
by Nancy Chadwick
If it’s done correctly, a Comparative Market Analysis (CMA) can be the next best
thing to an appraisal in approximating the value of a property. The purpose of
the CMA is to analyze data from properties similar to the subject that have sold
recently in order to project the realistic price at which the subject property
would sell. RE agents and brokers tend to develop their own methodologies for
doing CMA’s. I’m not an appraiser, but what I’ve always done is make upward and
downward adjustments to the projected value of the subject based on features and
characteristics of the comparables I use. Admittedly, these are subjective, and
some are based on “gut” feelings while other adjustments come about through
rules of thumb I have developed from experience. But putting a value on real
estate is an inexact science at best, and this methodology has worked pretty
well for me over the years in CMA’g residential properties. I use a completely
different method for projecting the value of land and property with residential
development potential.
How can you tell if the CMA is worth more than the piece of paper it’s written
on? Here are some things to look for.
Location
The RE agent or broker who does the CMA should be very picky about selecting
comparable properties. This means looking first for properties in the same
neighborhood or subdivision since these are likeliest to be virtually identical
to the subject. Differences in location can be very difficult to accurately
adjust for, so the comps should resemble the subject’s location as closely as
possible. If it’s necessary to look beyond the immediate surroundings, the
search shouldn’t extend into other municipalities and school districts since
property values there may differ significantly. Before I include a property as a
comp, I drive by it.
Time
Next is the time element. When did the potential comps close? I try to use
comparable sales data that is no more than 6 months old so I don’t have to
adjust for older sales. However, this depends on current conditions, so if it’s
a slow market, I may have to reach back farther in time. In addition, I only use
closed sales, not those that are active listings or are pending closing. A sale
isn’t a real sale until money and title have changed hands.
Housing Style & Use
Different housing styles can result in different values. So I try to stick with
potential comps that are the same architectural style as the subject – 2-story,
rancher, twin, townhouse, contemporary, split level, cape, etc. Land use or
zoning needs to be the same or comparable. I wouldn’t compare a property zoned
for residential with a commercially zoned property, even if the “comp” consisted
of a residence.
Size
Size, both of the house and the lot, are relevant. For differences in house
square footage (at or above grade areas only), I use a factor of around $35/SF.
This is not intended to represent actual building cost but rather my estimate of
the value that buyers in my area would place on the house size. Likewise, I use
a value of about $10,000 per acre for lot size. So if the subject is on a 1.5 AC
lot (and consists of only one separately deeded parcel), and one comp is on a
half-acre lot, I would add $10K to the estimated value of the subject. Building
lots in my area sell for much more than $10K, but in this example, the
difference between the subject and the comp is just excess land area, not a
buildable lot. If the subject or comp consisted of one or more separately deeded
parcels (buildable lots), then the amount of adjustment would be my estimated
value of the building lot.
Rooms
I also adjust for differences in the number of bedrooms and baths, as well as
for family room or not, garage capacity, central air, public v. on-site
utilities and basement.
Condition and Amenities
Adjusting for these elements can be tricky because my evaluation of potential
comps is usually based on drive-by evaluations supplemented by MLS and database
information and conversations with the agents involved in the transaction.
Things I take note of include maintenance-free exteriors, decks, type of
flooring, new or remodeled kitchens and baths and other capital improvements.
Age
There are many “other century” (18th and 19th century) structures in my area. If
the subject, for instance, is contemporary (20th century vintage or later), I
use a value of $1K for each year of age differential. E.g., the subject is 20
years old and one comp is 8 years old. I subtract $12K from the estimated value
of the subject. On the other hand, if the subject is 18th century, I try to find
comps from that same century, and use a value of $25K for each 50 years of age
differential.
My CMA takes the form of an Excel spreadsheet. There’s one column on the subject
and 2 columns for each comparable. The second column for each comparable
contains the + or – dollar adjustments for each property characteristic (such
as, age, lot size, house SF, basement, BR’s BTH’s, garage, C/A, location,
utilities, date of sale, amenities & misc). The bottom line is the range of
prospective sale values of the subject after the adjustments, positive or
negative, are totaled. If I’ve done my job right, the prospective sale values
should fall in a relatively tight range – the spread between the lowest and
highest shouldn’t exceed 5%.
Bio:
Nancy E. Chadwick, President and Broker of Chadwick Real Estate, Inc., is a PA
licensed real estate Broker and Instructor. She entered the real estate business
in 1982 following her career in the Philadelphia legal community as an
environmental and litigation paralegal. She has specialized in land development
for most of her real estate career, achieving top-producer status in several of
her past agency affiliations. Her services have been sought by a wide range of
clients, including builders and developers, non-profit organizations, estates,
REO departments of financial institutions, medical groups, consumers and other
real estate professionals.
Her book Land Buying & Selling is based on the state-of-the-art courses she
created that have been approved by the PA Real Estate Commission (for real
estate brokers and agents) and the PA Board of Certified Real Estate appraisers
(for certified appraisers and appraiser candidates). She also teaches courses
exclusively for consumers.