Let’s be completely honest… as a listing agent using the traditional method of doing a CMA, you can make the numbers say just about anything you want. I know that’s a pretty strong statement, so let me explain.
With the traditional CMA method, the agent selects three recently sold properties that closely represent the subject home (or the home being valued). In most markets, it’s easy to find three properties that sold high, three that sold low, and three that sold somewhere in the middle and still have many other comparables from which to choose.
The real problem is the sample size. In statistics there is a concept known as “margin of error”. The margin of error in any sample can be calculated with a simple formula. One divided by the square root of the sample size. For example if you have a sample size of 400, the square root of 400 is 20. One divided by 20 is 1/20th or 5%. The margin of error for a sample size of 400 is 5%.
When I teach classes on doing a CMA, I typically walk the class through these calculation on several sample sizes. What if you had 100 in your sample? The margin of error would be 10%. Or a sample of 64? A 12.5% margin of error. What if you had 25? Margin of error is 20%. A sample of 16? You’ve got it… 25%. Then I ask them what if they had a sample of just 3 comparables? Margin of error of 58%! “Mr. Seller… your home is worth $220,000… plus or minus $129,000!”
Do you see the problem? It’s the sample size. That’s why when the seller balks after you suggest a listing price, you immediately retreat and say, “Well, maybe I can try to find some different comparables and call you back tomorrow.” Then you go back to the office, tail between your legs, and rework the comps and voila, you manage to pull up a new CMA with the price the seller wants. Let’s be honest. We’ve all seen this happen, if we haven’t done it ourselves.
What many agents do is use the least expensive set of comps for their initial CMA. This method makes the case for listing the home as inexpensively as possible and allows it to sell quickly. But let’s not forget that as a seller’s agent your agency relationship is with your seller. That means that you should be getting your client the most money for his property, not the least.
“So great, Matt,” you’re thinking, “You just destroyed the way I’ve always done CMAs. How do you do a CMA?” Good question. When I prepare a CMA, I take data from three sources: tax records (sale and assessment data), closed comparable listings in the MLS, and active comparable listings in the MLS. Remember, to get the most accurate price possible, with the lowest margin of error, I need the largest possible sample size.
First I look at the tax records to determine what I feel to be the “adjusted” current value of the home. For example, if it sold three years ago for $150,000, and there’s been an appreciation rate in that area of 10% per year, I calculate the appreciation (3 x 10% = 30%, or $45,000), and then I add that figure to the purchase price. Now, instead of all that math, I just use the Appreciation Calculator that I recently shared with you. Certainly this particular method, alone, is rather subjective, but this is only one part of my valuation.
Next I pull up all the closed comparables in the area or subdivision, going back a reasonable period of time, and I can usually find between ten and twenty of these. (In extremely hot markets where homes appreciate at double-digit rates, you shouldn’t go back farther than a few months or so in order to prevent the CMA from being skewed downward.)
Don’t forget that the amenities and how nice a home looks will affect the curb appeal and saleability of the property but will have very little impact on appraised value, so it’s best to use as many comparables as possible. In selecting my comps, I use the subdivision, the square footage (with a range of plus or minus 10%), and the number of bedrooms and baths. I then calculate the average sale price of the group, eliminating any outliers up or down (e.g. homes that were foreclosures or distress sales).
Finally, I pull up all the active comparable listings. Again, I use the subdivision, the square footage, and the number of bedrooms and baths, but your market may be a little different in how the appraisers select comps. The point is to get as much data as possible!
Now we put it all together. Take the appreciation-adjusted value from the tax records, add the average price from the closed comps, and then add the average price from the active comps. Now take that number and divide by three, and you’ll have the true average value for the subject property. Write down this new number somewhere, add and subtract 5% from it, and you’ll have a “reasonable range” for the value of the home, which tends to be plus or minus 5% from the average. In most markets it’s reasonably easy to support a value within 5%; so once the property sells, getting the appraisal shouldn’t be an issue.
I know this is an out-of-the-box way of doing a CMA, but it will absolutely stand up under any amount of scrutiny by clients, other agents, or — most importantly — appraisers. Moreover, using this method will protect you from accidentally over-pricing or under-pricing a property. Most significantly, it will reinforce the fact that you’re a market authority and know what you’re talking about. If a seller client should be harboring a suspicion that you’re trying to skew the numbers, his or her fears will quickly be allayed because you’ve considered every possible comparable in arriving at the current value of the home. Nothing except an actual appraisal could be more fair.
But now comes the fun part. Instead of doing all that math, which is fairly time consuming, you can now use this simple calculator to build the Ultimate CMA and Proceeds Estimate in only a couple of minutes. This calculator is the perfect companion to the Ultimate Listing Presentation series you can find here on my blog. In less than 5 minutes you can create a scientifically accurate CMA and Proceeds Estimate that will impress any seller.
Note: To use this calculator, enter the original purchase price and date of the subject property, and the average appreciation rate for that period of time. Next enter the average sale price for closed comparable homes, then enter the average listed price of the active comparable listings. After that enter the approximate payoff for all mortgages against the property and the estimated closing costs the seller will be paying, excluding commissions. Finally, enter the choice of two different commission options (e.g., 6 and 8 percent) and the result will be your CMA.