Pricing your home correctly is the most important piece of your home listing strategy by far. All of the marketing and networking efforts you and your real estate agent make to sell your home will be ineffective if it is overpriced by a large margin. Any good pricing exercise is based around a solid comparative market analysis, or CMA.
A CMA is a report on a specific property (e.g. your home). It aggregates home values for similar properties within a limited distance that were on the market within a specific time period. The distance is typically within 1 mile of the subject property and the period of time is typically 3 months.
In areas with low population density or a very low sales volume, the distance and/or time range may need to be increased in order to generate enough data. Southern California, of course, is a densely populated market with a high volume of sales. Therefore, sticking to the 1 mile/3 month rule is almost always sufficient. In fact, it’s sometimes possible to only use properties within the exact same subdivision, which allows for even more accuracy.
Narrowing Down the Comparative Market Analysis List
The CMA process involves gradually whittling down the list of comparable properties and then adjusting their prices. This is all done with the intention of creating an accurate average price as a target for your home.
The first step is to filter out properties that are still active or pending. This is because the list price of a property may not be what it ultimately sells for. Agents don’t adjust the list price on the MLS during escrow. The price is only updated when the sale closes. Thus, it’s important to only use closed sales for CMA purposes.
The second step is to narrow the list down to the top 3-5 properties with the most similar traits. Some of the main elements that can be used in the CMA’s comparison are:
- Property location
- Square footage
- Number of bedrooms and bathrooms
- Lot size
- Age of the structure
- Interior and exterior condition
- Construction material quality
- School district
- Home improvements and renovations
- Landscaping condition
The third step is to assign value to comparable properties’ features that are either inferior or superior to the subject property. The assigned value is negatively correlated—meaning that if a comparable has an inferior feature to the subject property, you would assign a positive value to the difference, and vice versa.
This may seem backwards, but you do it this way because the adjustments are with respect to the subject property’s value, not the comparable property’s value. After all, the subject property value is the only one that actually matters.
Using the Comparative Market Analysis to Set Your Home’s Listing Price
Once you adjust values for comparable properties with respect to the subject property, you can assign a price per square foot to each. You’ll tally up the adjustments, and add or subtract them from the comparable property’s listed price. Then, you’ll divide this new total by the square footage of the property.
You will do this for each of the 3-5 comparable properties. Then, you’ll calculate an average price per square foot. Finally, you will multiply the average price per square foot by the subject property’s square footage. This provides an educated estimate of your home’s market value.
This might seem like a lot of work, but it’s well worth the effort. On average, home buyers are much more attracted to fairly priced properties. As such, these homes will get a lot more offers. Fairly priced homes also sit on the market for a fraction of the time that overpriced homes do. Having your home languish unsold for months does not put you in a strong position for negotiating a top sales price.
Buyers and their agents also use CMAs to help them make competitive offers. Because of this, it’s important to know what the CMA estimates your home value to be. If you decide to deviate from the market-supported price, you should be prepared to back up your reasons, and to emphasize them in your listing.
The Final Word
Hopefully this article has helped you understand how important it is to perform a comparative market analysis prior to listing your home for sale. As the CMA is a crucial piece of the selling puzzle, it’s the second of three steps in our pre-listing audit that we perform on all of our properties before they’re put up for sale. This helps to ensure that we sell our clients’ homes quickly and for a great price.
At the end of the day, you have to balance the goal of getting the most money possible for your property, with the naturally conflicting goal of selling your home as quickly as possible. By using a CMA as the foundation of your pricing strategy, you’ll be able to find a happy medium between these two opposing directives.
If you have any questions about identifying a fair market price for your home, please let me know in the comments. You can also contact us if you’d like to discuss specifics of listing your home in more detail.