A comparative market analysis (CMA) is a document prepared by real estate professionals to help determine the selling price of a home by comparing it to recently sold homes in the same area. To create a CMA, real estate professionals look at the price of recently sold, active, and expired listings that are similar (comparable) to the home they’re trying to sell.
There are two general situations where running a CMA is essential:
Any time you want to tell a homeowner how much their property is worth in the current market. This includes when you’re pitching referral homeowners, FSBO’s, and Expired leads.
The other time you should be running a CMA is to help a buyer determine if a home they’re very interested in is a good deal or not. You will eventually be able to know right away when a home is overpriced, but if you’re just starting out or working in an unfamiliar area, a thorough CMA will tell you if a home is priced right.
There’s an old saying in the real estate industry, “Those who list, last.” Though it may be a bit of a cliche, it’s a cliche for a very good reason. Agents who get sales listings tend to do well and stay in the industry longer than those who are stuck working with buyers. There’s no way around it.
There’s solid logic behind this simple truth about the industry. Along with marketing and closing expertise, determining the value of a client’s home is one of the most important skills a new agent can learn. In the age of Zillow, this is one of the only skills that separate the professionals from the amateurs. It is extremely difficult to get an accurate CMA without access to an MLS, so think of a CMA as your value add, special sauce, and secret weapon rolled into one. Here’s how to get started.
Before we get started, you should understand that you will essentially be running two comparative market analysis: One to get a sense of the value of the home BEFORE you go on your listing appointment, and one to present to the home owner AFTER you’ve seen the home to see how accurate you were.
Okay, I know what you’re thinking. You just told your prospective client that you can’t tell him how much his home is worth until you’ve seen it in person. It was one of the best lines in your Mike Ferry script. So why not wait until you get there? Simple. That homeowner you booked an appointment with might have three other agents coming that afternoon. She’s going to have questions ready for you. You need to have the answers.
After landing an appointment from a FSBO or referral, the first step in preparing your comparative market analysis is to assess the neighborhood. While you won’t really be able to properly assess the home until you’ve seen it in person, taking a quick look at the neighborhood online will help prepare you for the appointment.
Google Street View will tell you almost everything you need to know about the neighborhood surrounding the home you’re going to prepare a CMA for. Here are some things to look for to get the lay of the land:
Once you’ve checked out the neighborhood, see if you can find the original listing. If it’s still up, the listing should give you a ballpark idea of what you’re up against. Look very carefully at the pictures and description. This should give you a pretty decent sense of the condition of the home, any upgrades that have been made, as well as issues in marketing strategy.
Since Zillow’s Zestimates are only based on limited tax records and data added by agents, they should always be considered a starting point for valuation rather than an accurate estimate. Zestimates can be off by as much as 20-30%. For example, Zillow’s own CEO Spencer Rascoff recently sold his own personal home for 40% less than its Zestimate.
Sample Zillow Zestimate
If Zestimates are not reliable, why even look at them when running a CMA? Simple. Homeowners don’t know just how inaccurate Zestimates can be. Since Zillow dominates the real estate listings space, your clients will have already checked out the Zestimate for their home and may think this provides a good idea of its value. You need to be able to address the Zestimate when your homeowner brings it up.
Since Zillow is very upfront about the limitations of their Zestimates, they actually publish an accuracy rating of their Zestimates for states and counties. In order to tell how accurate the Zestimate is, you need to check the accuracy rating on Zillow. Here’s how you find out.
Go to Zillow.com and scroll down to the bottom of the page and click on “Zestimates.” From there, click on “How Accurate is a Zestimate”. This will bring you to a table called “Data Coverage and Zestimate Accuracy Table”. If you click on “States/Counties”, you can drill down and find the state and county your potential listing is in. Here’s that that table looks like for Texas:
The first column “Zestimate Accuracy” is an accuracy rating based on a star system. 1 star is very inaccurate, while 4 stars would be very accurate. The other columns show the number of homes in that county on Zillow, the number of homes with Zestimates, those that sell within a certain percentage difference from the Zestimate, and the margin of error.
Let’s look at Tarrant, Texas, as an example. Out of the 553.5k homes with Zestimates in Tarrant County on Zillow, only 33.9% had a Zestimate within 5% of the selling price. 58.3% were within 10%, and a whopping 79.5% came in within 20%.
Even though Zestimates can be pretty inaccurate, your potential client might not know that. This is why getting ahead of the question and backing up your answer with data is so crucial.
While you shouldn’t rely solely on Zillow and HouseCanary for your valuation, you need to show your potential clients that you are both thorough, and aware of the latest technology. HouseCanary, a Google Ventures backed home valuation and forecasting startup, offers valuations with an MdAPE (Median Absolute Percentage Error- a measurement of a valuation accuracy) of only 4.4% nationwide. That means you should be able to get a valuation that’s pretty close to market value that you can use to back up your own analyses.
Even though HouseCanary has a very low MdAPE, there are still factors that you should know that will affect the accuracy of their valuation. By comparing your final analysis to both Zillow and HouseCanary, you can show you are taking them into consideration. Since your homeowner will have likely already checked Zillow and possibly HouseCanary already, this will keep you one step ahead.
Even better, HouseCanary offers value forecasts that offer valuations three years out. While this information is more useful for buyers, you can use it as leverage for negotiating offers. For example, if a buyer tries to make a lowball offer, you can show them the three year forecast and run the numbers to show why your listing price is the right price.
Illustration via HouseCanary
Once you’ve assessed the neighborhood on Google Street view, checked out the listing, and looked up the Zestimate on Zillow, the next step is to fire up your MLS or CMA Software like Cloud CMA. These platforms take MLS data and create attractive CMAs that can be presented on tablets, viewed online, or saved as PDFs and printed out to leave behind with your homeowner.
The idea is look for comparable listings and come up with a rough idea of the home’s value. You need to look at sold listings, expired listings, active listings, and pending listings that are comparable to the home.
Unfortunately, since different MLS systems run on different backend software, we can’t run you through the exact steps you need to take in your MLS. Instead, we’ll walk you through some general guidelines about how to sort listings in your MLS by to find comparable homes. You’re looking for:
Sold listings will tell you exactly what similar homes in the area have sold for recently and are your primary way to assess value for your comparative market analysis. Expired listings will tell you pricing the market is not willing to bear. Pending listings can give you a good idea of what similar homes are selling for right now. Current listings will tell you what your competition is like.
Homes with the same number of bedrooms and baths as yours
Generally speaking, the number of bedrooms and baths is one of the most important criteria for valuing a home.
(i.e. if your home is 2,000 square feet, look at homes that are between 1500 and 2500 square feet) While it’s generally true that more bedrooms equal a higher price, square footage is almost as important. After all, bedrooms can be added or removed from a home fairly easily. Also, if a room meets the legal definition of a bedroom in the eyes of your local building code, dining rooms, dens, and offices can all be labeled as “bedrooms.”
Figuring out exactly what “neighborhood” the home is actually in can be very tricky. This is why assessing the neighborhood online is so important. See if you can find what locals consider the boundaries of the neighborhood. If there's no general consensus, geographic features like train tracks, highways, and shopping centers can also signify borders between neighborhoods.
This is another important factor, especially in big cities. Homes on one side of a street might be in an excellent school zone, while schools on the other side might be in a terrible school zone. The difference can add or remove surprisingly significant value from a home. While your MLS may have information on school districts, always double check as the boundaries can change. k12.niche.com is a good site to check school zone locations.
A home on ten acres of land is going to be worth more than a home on one acre. Generally speaking, lots in most neighborhoods are roughly similar sizes.
This is another tricky one. While brand new homes are generally valued higher than older homes, some older homes, especially antique homes or mid-century modern homes, might command a premium over new construction. Depending on the changes that have taken place in the neighborhood, new construction might be high end, low end, or comparable to the existing inventory. if you don’t know much about the neighborhood, ask a coworker who does.
For example, if the home has an inground pool, try to find other listings with inground pools. If the home is oceanfront, comparing it to other oceanfront homes will yield much better results than comparing it to homes a few blocks away from the water.
Now that you’ve narrowed down the criteria of your search, you should have several homes that are roughly comparable to the one you’re running your CMA on. The next step is to take the selling price of the comparable homes you’ve chosen and divide it by their square footage. This will give you the price per square foot for each comparable home.
After that, find the average between the prices per square foot of the comparable homes. Now multiply the average price per square foot by the exact square footage of the home you’re running a CMA on. Congratulations! You’ve come up with a fairly accurate estimate for the price of your potential client’s home.
Let’s say the home you’re running the CMA on is a 3000 square foot ranch. You find 4 comparable homes when you run your CMA.
Home one is 2700 square feet and sold for $500,000 (price per square foot: $185)
Home two is 3200 square feet and sold for $525,000 (price per square foot: $164)
Home three is 3300 square feet and sold for $510,000 (price per square foot: $154)
Home four is 2650 square feet and sold for $495,000 (price per square foot: $187)
Home five is 3100 square feet and sold for $515,000 (price per square foot: $166)
After crunching the numbers, we find that the average price per square foot for these homes is $171.20. Multiplying our home’s square footage (3000 sf) by the average price per square foot gets us an approximate value for our home. So, $171.20 x 3000= $513,600. Congratulations, you now have a rough estimate of your home’s market value!
Now that you’ve done your research, you should be very confident when meeting the homeowner and finally seeing the home in person. After all, you already have a pretty good idea of what the home is worth, so you should be able to address any questions about value the homeowner has for you.
Now you need to tour the home to see if there are any hidden issues which will affect the sales price. You should be on the lookout for things like;
Condition – Is the home in very poor condition or very good condition?
Additions and upgrades – Has the homeowner added a swimming pool? Central AC? Skylights? All can affect value.
The Property – Has the landscaping been recently upgraded? This can increase value as well.
If there are any major issues that weren’t apparent from your initial research, either run a search for new comparable listings that better fit the home in its current state, or adjust the price per square foot of the home to reflect the differences.
Now that you’ve done extensive research in the neighborhood, looked up comparable listings, and assessed the home in person, you are ready to put together the final comparative market analysis to present to your potential client.
You can either put together a powerpoint or keynote presentation, save as a PDF, print out and present in a binder, or use CMA software to present to your potential client in a web or tablet presentation.
At the end of the day CMA software offers several advantages over DIY options. They organize the data in a much more attractive way, as well as provide useful information for your potential clients.
“A common mistake that new agents to is to use comps that are all smaller than the subject property. Often smaller comps can skew the price per square footage and artificially inflate the price of the subject property. A rule of thumb is that there should always be a smaller and slightly larger property used in the mix of final comps chosen. Another common mistake is the not to make adjustments for items like condition of the home, updating, pools and other major locational factors like being on a conservation lot verses by a busy road.”
The person completing the CMA needs to make sure they are using comparable properties that are similar to the subject in style, age, condition, type, and location. Usually some good guidelines are:
Aside from the normal beds/baths, square feet, and lot size you have to closely look at the less obvious issues that can deduct from market value. For instance, if someone adds 1000 square feet to their property is it in harmony with the rest of the house or does it look like an apartment building? Does the house maintain its character or has it been remodeled to reflect the current bad taste of the owner?
Other less obvious clues include a house situated on a busy corner or street, a floor plan that has a poor design such as going through a bedroom to enter another bedroom and updates that were last done in the 1980’s.
Cosmetic upgrades (kitchen and baths) also will add much more value than other less obvious system/construction upgrades such as new plumbing, newer roof, insulation, earthquake bracing. Consumers do not see this, therefore there is no WOW factor or emotional appeal.
The best CMA’s include an estimate of the increased or decreased value the subject property has when compared to the comps. This format provides fewer opportunities for the owner to question the value and price it too high.
There are software solutions provided by most MLS systems that produce very polished looking reports. But, regardless of the software used, the most important thing to remember when preparing an effective CMA is that the real value is in the data and your interpretation of it. It is of course important to have a concise, professionally prepared presentation, however don’t let the “appearance” take on a higher importance than the selection and interpretation of the data.
Newer agents need to be aware that a full and detailed report cannot be complete without a similar market analysis of the properties listed and competing with their home in real time. In conjunction with your analysis of the recent sales history of similar properties, this current market information is crucial in determining your maximum list price recommendation.
For CMAs use a combination of Cloud CMA, RPR & the MLS. An important tip for new agents is to make sure when creating a CMA to make it as easy as possible for the seller to understand. If the CMA report confuses you, then it will most likely confuse the seller. Software like HouseCanary is a good starting point for CMAs but it is important to really look at the picture, upgrades and specific location of the recent closed sales used in your CMA report to get the most accurate valuation possible.
In every CMA, provide all Actives, Under Contract, Pending and Sold listings that are the closest matches to my seller’s location, home size, amenities, property conditions, and neighborhood characteristics. Use listings that are within a mile of the property to again maintain as much similarity as possible. All sold properties are within the last 180 days if possible, although some properties are unusual and you have to dig further into past sales to find comparables. The info on every comparable includes all photos. The seller can also see his property’s characteristics next to the comparable’s characteristics so the similarities and differences are on the same page.
This CMA system allows you to adjust the market value of the comparable listing. You may have to add or subtract from the listing price all items affecting the price that do not match between the comparable and the seller’s home. It also has space on each listing to comment on your financial adjustments.
Also show pricing trends, Days on Market and Price averages and medians and recommend a listing price. Seller’s will often comment happily on the accuracy of your analysis and pricing. They realize that if they go on the market at an unreasonably high price, they will be on the market much longer and will eventually lower their asking price (often below what you recommended because the market has changed) in order to finally sell.
Once you understand how they work, running comparative market analyses can be fairly straightforward. While accurately pricing a home can involve more market knowledge than we discussed in this article, you should now be able to run a pretty accurate CMA to land your first seller client.