By Jeff Sorg, OnlineEd Blog
(October 25, 2018)
(Portland, Ore.) OnlineEd® – As a part of a licensee’s fiduciary duty of care, a Comparative (or Competitive) Market Analysis (CMA) should be prepared before a listing price is established with a seller or before an offer is prepared for a buyer. The CMA price is established by comparing the subject property to similar properties actively on the market, listings that have expired without selling, listings that have an accepted offer and are in pending sale status, and listings that have closed escrow and are in sold status.
A CMA is NOT an appraisal; rather it is a written analysis by a real estate licensee relating to the probable sale or offering price for a specific piece of real estate in an identified real estate market. A CMA is specifically used for assisting a buyer in arriving at an offering price or for assisting a seller in arriving at a listing price.
CAUTION: A CMA is limited to establishing the asking or offering price for a specific property for a specific client. Any activity that attempts to establish a value for property for any purpose outside of this limited scope does not fall under the definition of a CMA and requires a licensed appraiser.
A CMA has no required format and can be as simple as a written opinion of a listing or offering price, or can include a more detailed analysis that would review and analyze comparables or details of adjustments. One item that absolutely should be included in the CMA is a disclaimer that a CMA is NOT an appraisal.
EXAMPLE: “This analysis has NOT been performed in accordance with the uniform standards of professional appraisal practice that require real property valuers to act as unbiased, disinterested third parties with impartiality, objectivity, and independence and without accommodation of personal interest. It is not to be construed as an appraisal and may not be used as such for any purpose.”
A detailed CMA is more or less capsulized information comparing the subject property to comparable properties. The information sets forth the number of bedrooms and bathrooms, approximate square footage, the size of major rooms, amenities (fireplaces, swimming pool, etc.) age, property tax amounts, lot size, the presence or absence of a garage, and so forth. To get a complete picture of the marketplace, the information for the CMA is collected on available listings, pending sales, sales that occurred within a reasonable time based on current market conditions, as well as information about listings that did not sell during their listing period (expired listings). A CMA can include an area as narrow as one or two streets surrounding the property, or as broad as an entire neighborhood or subdivision but it is important that comparables be located as close to the subject property as possible, whenever possible.
For sellers, the currently available listings are competition for the seller’s property. How the seller’s property will be priced relative to the competition will be critical to the ultimate success of the agent’s marketing efforts undertaken to sell the property. Pending sales will represent the most recent sales activity in the area. Since the actual sale price of a pending sale is not made public until it closes, the sales price is not known at the time of the CMA and the neighborhood grapevine should not be relied on since a combination of wishful thinking and enthusiasm can result in a rumor that a listing sold for an inflated price. All that can reasonably be relied on by the broker preparing the CMA is the last listed price and the actual sale price may be greater or lesser than the listed price.
WARNING: A listing agent should never disclose the pending sales price just in case the sale does not close and the property comes back on the market.
When analyzing comparable sold properties, some issues should be taken into account. For example, in a slow market, it may be necessary to use properties that sold 12 to 18 months ago and, in a fast market, using properties that sold only 3 months back will be a better indicator of the current marketplace. However, whenever there is an adequate number of sales in a more limited period, these sales should be used. Expired listings usually indicate the highest price range for the subject property, since the most common reason a listing expires without selling is that it was overpriced for present market conditions.
In evaluating the sold price for comparables, inferences can be made about the selling price based on the market history of the listing. This analysis should include such factors as:
- how long it took to find a buyer for the property;
- if the price was reduced to stimulate an offer;
- did the seller receive multiple offers at the same time;
- did the seller pay any buyer closing costs or make other financial concessions; and
- any other information that is available by making inquiries of the listing licensee.
A CMA does not include factors that affect perception. Perception is the key difference between why one house with identical features will command a higher price than a perceived twin. Because perception alters reality, perception is a crucial consideration in understanding the buying and selling process beyond a CMA – in other words, price will ultimately be determined by the emotional impact the property has on a particular buyer. These emotions tend to be based on subjective elements such as curb appeal, interior decor, colors, views, light, and room flow.
The CMA will usually include a brief statement by the licensee suggesting a “reasonable” or “suggested” listing price or price range. This statement is usually a combination of fact and subjective opinion based on the licensee’s “feel” for the current market. Estimating a probable sale price based on a CMA involves a certain amount of subjectivity and is easiest when done in neighborhoods of tract housing with little style and size variation from house to house.
A licensee’s knowledge of the local market could affect the accuracy of a CMA. For example, unless a licensee is familiar with or has seen the comparable listings used in the CMA, it is difficult to draw the correct conclusion for a probable sale price. In analyzing CMA data, the licensee should at least drive by the properties discussed in the CMA to get an understanding of how they compare to the subject.
Sellers and buyers should carefully analyze their CMAs, giving special attention to the sold listings. Sold and closed listings are the most reliable indicator of what the market will bear price-wise, and market price is ultimately determined by how much a willing buyer will pay for a property and how little a willing seller will take for the property. These price opinions are always influenced and adjusted by the sales dates of the comparables. In other words, a property that sold yesterday wouldn’t need to be adjusted based on its sales date but one that sold eight months prior would either need to be adjusted up or down based on current market pricing trends.
CAUTION: When preparing a CMA, avoid using “appraisal” and “value.” These words are reserved for licensed appraisers and
OnlineEd blog postings are the personal opinion of the author and not intended as legal or other professional advice. Be sure to consult the appropriate party when professional advice is needed.
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