If you are reading this expecting to see part II of my series on the changing real estate market, I apologize but you’ll have to wait for next week. This is a big week for me personally – my youngest son graduated from UCLA last weekend and my oldest is getting married this weekend – so I haven’t had the time to finish doing the research. I think you will find this article very informative in the mean time.
In the Professional Real Estate Investor class, we teach how to create a CMA (Current Market Analysis). In this article, we’ll look at the basic elements that will help you understand a CMA on residential property.
If someone were to ask you what your home was worth, what would you answer? I typically hear, “Well the guy down the street sold his house for $$$, and my house is much nicer so I’m sure it’s worth twice as much…” Sound about right?
Valuation of property is broken down into two elements Tangible and the Intangible.
Step One – The Tangible: What other properties have sold for in your neighborhood, otherwise known as comps. You also need to consider expired and current listings. Depending on the market, expired and current listing can provide a better picture of the value today. Below I define what sold, expired, and current mean.
Sold: These are properties that have sold and recorded. Depending on the current market conditions, these values are anywhere between 30 to 90 days old or older. Compare the day the property was put on the market and the day the property closed.
Expired: These are properties that were listed on the market and that have now been terminated without being sold. These properties are typically considered to be overpriced for the market. Expired listings can help you understand what’s out of the price range for the area and also perhaps qualities that are unappealing to buyers.
Current: What properties are currently listed for and current competition.
We now have comps from three different time frames, how do we narrow that data? Use these criteria:
Apples to Apples – find the comp(s) that are most like your subject property, i.e. beds, baths, square footage, lot size
Proximity – how close is it to your subject property, the closer the better
Year Built – there is a big difference between a home built in 1930’s, 1960’s or 2000’s
Current – finding the most recent comp(s) whether sold, expired or current, create a snap shot of NOW
Style – similar construction type, i.e. hard to compare a Craftsman to a Spanish bungalow
Feature differences – pool (in some neighborhoods it can devalue a property in others it’s considered an amenity), upgrades, quality of windows, etc.
Financing – a property will often sell for a premium if the financing is carried by the seller, this can be deceptive
Distressed – if the comp is a distressed sale, its sold price is most likely lower than market
Location within the neighborhood – quiet streets and culs-de-sac are more valuable than a house that backs up to the main street
Step Two – The Intangible, things that can’t be judged by data or numbers:
Make up of the neighbors – for example: are there a lot of young families
Status of the street or neighborhood
How well the property fits into the neighborhood
If the property has a lot of natural light
When trying to determine the value of your personal real estate, emotion can often become a factor. What makes your home special and unique to you isn’t what other buyers necessarily find valuable. That’s why, if you are closely involved with the property, it’s great to get a third party’s opinion (i.e. a real estate professional).
The value in having a good CMA is the data and the interpretation of that data as it relates to your specific market and property. One of the things we spend time on in class is where the best data is accessed.
Look for Part II of Changing Demographics in America: What Does it Mean to the Housing and Building Markets, next week and thank you for your understanding.