What is a CMA, Appraisal, and AVM?

 

What is a CMA, Appraisal, and AVM?

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Sellers ask, “How much is my house worth?”

The answer is, “Whatever someone’s willing to pay for it.”

Buyers wonder, “How much should I pay for this house?”

The answer is, “What it’s worth to you (even better if it’s a deal).”


To guesstimate what someone is willing to pay for a property, REALTORS® often use the Sales Comparison Approach to estimate a property’s value. That’s what a CMA is. CMA can stand for Comparative, Comparable, or Competitive Market Analysis.

It’s also referred to as a “Comps Report”, and the comparable properties are called “Comps”. For example, “What are the comps for this property?”

There are two other valuation methods that could be used by an appraiser:

  • the Cost Approach (i.e. rebuild/replacement cost, often used for new construction)
  • the Income Approach (often used for income-producing properties, including commercial property)

Since REALTORS® have access to comparable sales information (and since it’s most often the appropriate valuation method), we compare the subject property (your own house if you’re a seller, or the house you’re considering purchasing if you’re the buyer) to like-kind properties (comparable properties).

Although similar in approach, a CMA report is significantly different from an appraisal, which is one reason why CMAs are usually provided by REALTORS® at no charge and why licensed appraisers can charge hundreds of dollars per report.

An appraiser’s duty is to establish an opinion of value for their customer’s purpose (e.g. sell property or lend mortgage funds toward a purchase). They use similar methods but are required to follow strict licensing and industry guidelines. They must also comply with the Uniform Standards of Professional Appraisal Practices (USPAP).

What’s Included in a CMA?

A CMA provides a variety of comparable information about each property included in the report: both the subject property and its comps. These items are often included in a CMA:

  • A map of all properties included in the report (useful for comparing location)
  • Information about each property:
    • MLS# (if recently listed in the MLS)
    • Address
    • Status (e.g. Active/For Sale, Expired, Withdrawn, Pending/Under Contract, Sold/Closed)
    • Square footage (sqft)
    • Bedrooms
    • Full and Half bathrooms
    • Garage capacity
    • Year built
    • List/Asking price
    • Sold/Closed price (if recently closed)
    • List price per sqft
    • Closed price per sqft
    • Days on Market (DOM)
    • Cumulative DOM (if re-listed for 30 days after its 180 day listing expires, Cumulative DOM would be 210, but DOM would be 30)
  • The search criteria / filtering used to generate the report

What should my CMA’s Search Criteria be?

In order for a CMA to be considered useful, it should ideally only reference recent and substantially-similar properties.

While each property is truly unique (each differs in exact location at the very least), most are able to be compared to. Sometimes a property just doesn’t have any great comparables, or there might not be enough recently sold comps.

Typically, we only want to compare to properties Sold/Closed in the past 3-6 months. If there aren’t enough comps within this time frame, a time period of 9, 12, 18, or 24 months may be used, but the information isn’t as beneficial due to its age.

Instead of looking further back in time, sometimes the search criteria may need to be altered a bit. For example, a neighborhood-wide search may include better comps than limiting to a quarter-mile radius from the subject property.

Importantly, we want to make sure we’re comparing to substantially-similar properties. For example, if the subject property is 4/2.5/3 (i.e. 4 bedrooms, 2.5 bathrooms, 3 car garage), we don’t want to be comparing to 3/1/2 properties because they’re not comparable.

Additional factors may come into play as well. For example, if most homes are selling for $100,000 but an otherwise-comparable bank-owned foreclosure recently sold for $70,000, it may be excluded from the CMA due to not being a similar sale condition. The bank may have put a below-market value price on it just to liquidate. Just one of these sales might not be a good influence on the rest of the homes in the area when trying to estimate their Fair Market Value (FMV).

Within a small area (sometimes same neighborhood or adjoining neighborhood), there may be a wide variety of size, year built, condition, amenities, etc., which is why recent activity and location are not sufficient. We also need to compare to comparable properties.

What can a Good CMA Tell me?

Let’s start with what a CMA isn’t.

A good CMA isn’t a crystal ball prediction of what your home will sell for or what it will be worth in the future.

Instead, it’s a compilation of real estate information for your reference only. Its information is deemed reliable but is not guaranteed (the standard disclosure text on most reports).

You may use the CMA report(s) to draw different conclusions from those of your REALTOR® because of your different points of view, motivations, experience, etc. It may be in line with your expectations, or it may be significantly different.

If your CMA is significantly different from your expectations, make sure to give it a thorough look-through, make notes, and then share your opinions. Living in the area for the past 10 years may provide you additional insights your REALTOR® may not be informed of or might have forgotten to account for (we’re human too).

Assuming the CMA is well-prepared, all parties referencing it will be able to use its information to estimate your home’s value based on a “price per square foot” calculation.

For example, if the average among the comps is $100/sqft and you have a 2,000 square foot house, your property may be estimated at $200,000, sometimes expressed as a range, like $194,000 – $206,000 (±3%).

$/sqft is a time-honored way to estimate because it should only be comparing to similar size (square feet, acreage, bedrooms, etc.) and otherwise comparable properties.

If the comps have significant differences (because they were the best that could be found), such as 1 acre vs 5 acres (otherwise very similar), then the valuation adjustment should be made per comp to change the calculated $/sqft per comp and therefore the overall average. Note: each comp and its adjustments should only be compared to the subject property, not to another comp.

All in all, a good CMA can provide you with some or all of the following information:

  • What homes like yours are selling for
  • How long homes like yours have taken to sell (DOM prior to accepting an offer)
  • The difference between sellers’ listing/asking prices and their closing prices (List to Sale Ratio)
  • What list price similar properties were at before they didn’t sell (e.g. Expired and Withdrawn listings)

CMA vs AVM

Both CMAs and appraisals are created manually (or automatically generated and then manually reviewed/tweaked).

An Automated Valuation Model (AVM) is a computer-generated dollar amount intended to provide a quick reference valuation estimate.

While CMAs, appraisals, and AVMs are all estimates, AVMs are often criticized for being significantly inaccurate.

Although an AVM is more accurate than throwing darts to match up properties and their valuations (i.e. totally random), it’s not as accurate as a CMA because there’s no human oversight and because there’s no telling which properties were included as comps and how much each comp influenced the subject property’s estimate.

Zillow’s Zestimate® is the most famous AVM (but there are dozens more). As of October 2014, Zillow’s self-reported accuracy for Tulsa County is as follows:

Only

Zestimates: Accurate within 5% of the sale price less than half the time

There aren’t any statistics for CMAs’ accuracy because each one is uniquely prepared, but no AVM should be considered “accurate”. The “A” in AVM stands for Automated, not Accurate.

5% difference may not sound significant, but it is when dealing with hundreds of thousands of dollars. For example, if you were told your house is worth $170,000 ±5% ($161,500 – $178,500), that’s really close to saying “somewhere between $160k and $180k”, which most homeowners already know… and this 5% ($17,000) range ends up being accurate less than half the time per Zillow’s own reporting.

While AVMs aren’t pointless (they have their place in the industry), we’ve noticed they typically hurt the public more than they help because it’s just too tempting for buyers and sellers to latch on when they see a seemingly definitive single dollar amount.

In summary, an appraisal costs hundreds of dollars and is the most comprehensive. A well-prepared CMA is considerably more reliable than an AVM, and we wouldn’t be sad if all AVMs got turned off tomorrow.

How to Obtain a CMA

As stated before, REALTORS® usually provide a CMA at no charge. However, since they can take quite a bit of time to prepare (15 minutes to 2 hours), REALTORS® usually prefer to only provide CMAs for properties you’re really interested in.

We provide CMAs to homeowners whenever they’re considering selling to help them determine a reasonable listing price, and buyers reference our CMAs when evaluating purchase decisions.

We may also provide CMAs and other market metrics (e.g. Absorption Rate) to sellers periodically throughout their time on market to help them understand their property’s competition (i.e. other properties buyers may be considering in addition to theirs).

Long story short, just ask and we’d be happy to help you with your real estate research!


Real Estate Answers: Buying, Selling

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