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.
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.
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, 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.
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.
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%.