Determining the value of your Real Estate Property: differences between a CMA and an Appraisal and other considerations.
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What are the most common ways consumers use when they want to find out the value of their real estate property?
The first thing many of us would do is to google your property evaluation which will lead you to sites such as Zillow, Trulia or Realtor. This sites by using artificial intelligence will give a value to your property, based on many data points that are publicly and readily available (the square footage, the size of your lot, google earth photography) and average data for your area´s value. While this is easy enough, it may not be accurate at all. Even though Artificial Intelligence evaluations have got much better as of late, they are not an accurate way of finding your value and may lead you to take the wrong decision when pricing your property for sale. The main reason is that every property is unique, and these online tools are not going inside your property, checking its condition, its layout, its upgrades, and other intangible features such as view or proximity to an amenity or a highway.
Another way many homeowners will use to try and determine the value of their home is to go by the tax assessor´s letter. Municipalities will mail you these notices once a year, advising you of the value they give your home, which is then used to calculate the real estate taxes you pay, by using different calculations. The main goal of this assessments is to come up with a way to collect the real estate taxes needed to meet municipal budgets, not to determine the accurate value of properties. Like Artificial Intelligence, tax assessors do not go inside your property or evaluate certain interior improvements, the layout, selling points or negative location features. They merely look at the outside and at general public information. And many times, they make mistakes, reason why there are procedures to contest the evaluation done by the tax assessor (tax certiorari procedures). At times, the assessment by your town may be too high which results in you paying more taxes than you should. At other times, if the town have not been keeping up with a rapidly changing market, the assessment may be low, leading you to believe the value of your property is lower than what it would really fetch in a certain market. Therefore, tax assessor´s letters are not an accurate way of determining the value of your property.
Another strategy homeowners use is asking a neighbor that recently sold their property about the sales price. In addition to the fact that every property is unique and that every sale is influenced by specific personal circumstances, we have the fact that many times people do not want to volunteer all the information. To put it in a positive light, your neighbor may be just embarrassed to share with you the actual selling price and may give you the asking price instead. You only know for sure how much a property sold when it closes, and it is registered in the public records. Additionally, there is the fact that we tend to believe our property is superior to that of the neighbor because we are emotionally biased towards that, because we have raised our family there or fixed the property sometimes with our own hands. Therefore, some of us would think that if Joe across the street got x amount of dollars for their property, then our property is worth y or z. Obviously this is highly subjective and inaccurate. Many home sellers to be start also researching the prices in the neighborhood by going to open houses, or by calling for sale signs. The trouble with this strategy is that you are looking at asking prices, not final selling prices. This can lead you to make a gross mistake as the final closing price of a property is often different to what it was listed for, due to negotiations and market conditions.
I will explain next the most common ways of determining real estate values. They are the Comparative Market Analysis (CMA) and the Real Estate Appraisal.
The CMA is a priori analysis done by a real estate agent working with a client and trying to advise them as to the most likely market value of a property and/or the ideal asking price in a certain market. It is usually a free service, and like everything else, its accuracy may depend in the experience and local knowledge of the agent. Sometimes, accountants working on determining the value of an asset for estate purposes (stepped up basis) would accept the value of a CMA and won´t require an actual licensed appraisal.
The appraisal is done by a licensed appraiser and it is in most cases a posteriori analysis done to validate the value of an asset that is being sold and that needs to be financed, mainly to support the value in the contract of sale and to justify the decision of the mortgage lender to make the loan. Appraisals can be done in other cases, without a sale being pending, like in the case of court procedures, litigation, divorces, where the court orders the appraisal to determine the value of an asset in dispute.
Here are the major differences between a CMA and an Appraisal:
The Comparative Market Analysis is usually done by a real estate agent and:
- Typically uses information of recent sales from the MLS (multiple listing service) taken this information as objective and accurate.
- It focuses on sales that are 6 months old or more recent, of similar properties to the subject property called COMPS (comparable sales). The comps should be similar in type, design, size, and features. The experience of the agent selecting these comps may dramatically affect the outcome of the CMA.
- CMA´s also consider the information of similar properties that are available for sale. This allows an experienced agent to spot the market trends. If available inventory of a certain type of home in a certain area is very limited, the final price may be higher than what the sold comps show. Conversely, if the inventory is plentiful and the demand for a certain type of house in a certain neighborhood is weak, the final price may be lower than what the sold comps show.
- The CMA will also look at the records of home that did not sell. Therefore, it is important not to take the asking prices of homes as an accurate indication of their value, because you don´t really know if a particular property would end up selling or not, and the final price it will reach in a certain market. By looking at the prices of unsold homes, an experienced agent may point what price may be too high as an asking price, because in most cases, the main reason a property does not sell is that the asking price was wrong. In only a small proportion of cases, a house will not sell because of poor condition, issues with the tenants, lack of motivation from the seller, lack of experienced of the listing agent, financing problems, etc. The most common reason a house does not sell is the price because all houses sell when they are priced right and the more accurate the asking price is, the most interest it will generate in the market. So, by looking at expired listings your broker can show you what to avoid.
- The consideration of available properties and expired properties is much more common in CMA´s than in appraisals. The appraisals will take into account the general conditions of the market but not look at the direct competition of other available properties or the houses that did not sell. This is an advantage of CMA´s over Appraisals.
- CMA´s will also look at Days On The Market, or DOM, which are the days a house takes to go to contract from the day it was listed. This will show you a general trend in a particular market. If the average DOM in Queens is 30 days, and you see that properties start selling in 10 or 12 days on average, the market is getting hot. But if properties are starting to take longer to sell, maybe with 60 average DOM instead of 30 this may be a sign that the market is slowing down, demand is weaker, and you should not be as optimistic when pricing your property. A similar indication can be obtained by looking at the ratio of Sales Price over Asking Price. If the difference between the final price and the original price starts decreasing, it means that sellers are getting closer to their asking prices and the market is stronger. If this difference starts increasing, it means that the buyers feel they can negotiate more and are not as motivated to pay closer to the asking price.
- Most agents are realtors and as such abide by a Realtor Code of Ethics. This code specifically warns agents that giving the wrong pricing advise to a homeowner while trying to secure a listing is unethical. In other words, agents that are trying to secure your signature to list your property may feel the temptation to tell you what you want to hear as far as value only to change the story later, when you don´t obtain the desire results. This is clearly unethical, but it happens more often than not, and it is a disadvantage over the appraisal process.
The appraisal, as stated above, is performed by a licensed appraiser who looks mainly at records of similar sold properties. Here are some other differences with the CMA:
- The appraisal will use information gathered during an inspection, as well as MLS and public records information. The difference is that the appraisal has a duty to verify this information and cannot assume the information is accurate as many times brokers do when they get data from the MLS. This is an obvious advantage of the Appraisal over the CMA.
- Appraisers also have strict guidelines and requirements dictated many times by their own professional standards or by the mortgage lenders. They may use COMPS that are similar to the subject within a certain measurable margin. They may use COMPS sold only within a certain number of days, etc. Brokers may be more relaxed about these criteria. This would result in a major accuracy of the appraisal over the CMA, if your broker is not experienced enough. If you are comparing colonial homes, you would want them to be similar in their square footage, for example, as comparing houses that are very different in size would result in unreliable values. Experienced brokers understand this, and appraisal must apply these criteria, but CMA´s done by a rookie broker may have obvious mistakes.
- There is also a difference in how appraisers handle the different features, amenities, or improvements that a property has, and others may not. This is done through the process of adjustments and they are done in a more regulated, systematic way than in the case of CMA´s. For example, if the subject property has a garage, the appraisal will try and find comps with garages, in order to not have to do a value adjustment. But if they don´t exist then the appraiser is supposed to determine the value of this amenity by looking at market records and adjust the value of the comps accordingly. Not all brokers are typically trained for this and their adjustments maybe more subjective.
- As said before, Appraisals do not always consider available comps, unless required by the lenders, or expired comps. Therefore CMA´s maybe better at spotting market trends than appraisals.
- Appraisals also must verify that a home is in livable conditions and in general compliance of business codes in order to qualify for mortgage financing. Experienced brokers may help you anticipate these issues, that otherwise would be a red flag in the appraisal report later, when the property is already in contract (items such as disconnected utilities, exposed wires, missing handrails, or illegal apartments).
- Appraisers also must verify that the conditions of the sale were normal (an arm´s length transaction) and would avoid valuing an asset by using comparable sales of properties sold under pressure, foreclosure or shortsale if the subject property is being sold without these conditions.
- Appraisals also look at the timeframes of the comparable sales, favoring more recent data if it is plentiful and abiding by the guidelines imposed by their lenders. They may go outside these guidelines if there are no recent sales or the property is unique or part of a submarket where the turnover is small, such as in luxury enclaves or with certain type of unique properties.
- There is other type of evaluations called BPO´s or broker price opinions, which are usually ordered by lender´s to get an idea of value without having to pay for a licensed appraisal. They are usually done by real estate brokers and are usually drive by inspections. They are ordered by lenders who want to make a quick decision on a mortgage that they hold (shortsales, foreclosures, transferring the mortgage, etc.).
Because the appraisal is done after contracts are executed, in most cases, it is important that you select an experienced broker when asking for a CMA and deciding on your listing price. You really do not want to overprice or underprice your house, as this may result in stressful situations or loss of money. You want to base your decision on an accurate evaluation of your property. I have been evaluating property for over 26 years and I am proud to say that some of my seller clients have been licensed appraisers themselves, real estate attorneys, out of state real estate brokers and banking institutions. So, if you want to know the value of your property just out of curiosity or to keep up with the market conditions, call me for your free, no obligation CMA at any time: 917-559-2002.
Lic. Broker Associate
Keller Williams Realty Landmark I and II