The home buying experience is quite exhilarating and, at the same time, overwhelming for some buyers.
Before making an offer, buyer's agents usually refer to two documents - CMA and Property Appraisal, to help their clients make a better decision.
So, how does it work?
How do these documents help make a sound buying decision for the buyers?
What is CMA?
CMA is short for Comparative Market Analysis.
As you may have guessed, the report or document usually compares the subject property with similar properties in any area. Usually, the CMA is conducted within a certain radius of the subject property for similar types of accommodation.
For example, if the subject property is situated in Rodney Ave, Portland, OR, the CMA would usually include properties that are within the same neighborhood. Besides, depending upon whether the subject is a condominium or a townhouse, the other properties would also be within the same category.
Real estate agents use CMA to help their buyers confirm whether to make an offer lower or higher than the listing price.
What is Property Appraisal?
The second document that buyers need and usually come across is a property appraisal report.
It is an analysis that a mortgage lender usually carries out on a property to assess whether the offered or listed price is appropriate or not.
For example, Mortgage Lenders in Portland Oregon, may need to conduct a property appraisal for a townhouse property listed at $1,000,000. The objective of appraisal is to evaluate if the property is overpriced or not.
Now, the noteworthy point here is; property appraisers also consider CMA reports for appraisal purposes.
How does CMA help with Property Appraisal?
Consider a situation; you are to buy a property in Portland, Oregon.
You select a neighborhood, search for properties on sale in the area, and reach out to your agent.
The next few steps would include walking around the property, reading listing disclosures, evaluating what's included and what's excluded from the sale, and so on.
Once you're sure about a property, you ask your agent to suggest an offer price.
Now, this is where your agent would search for the sales from the last few months in the neighborhood with similar specifications. Your agent would then prepare a CMA including:
- The address of the subject property and the comparables.
- A short description of each property, such as elevation, floor plan, lot size, cost per sq. footage, number of bedrooms and bathrooms, and so on.
- And the fair market value of the subject property.
These inclusions are put in to make it easier for you to decide the best offer. You can further look at the mean and median selling price in the neighborhood for better judgment. And, if needed, can make counteroffers too.
Raising Demand for Mortgage
Before you share the offer with the seller or the agent, you would want to get a pre-approval from your lender.
You've already selected the property, you've also gone through the CMA, and decided your offer price. But, you'll need your lender to approve the property too.
After all, you can't be making the entire payment out of your savings.
Nonetheless, upon raising demand for a mortgage, your lender would appoint an appraiser. The appraiser would physically visit the property to see if everything is as listed or not.
Upon thoroughly checking out the property, the appraiser may ask your agent for a copy of the CMA. Or they may also choose to perform CMA by themselves.
The appraiser would be looking for any discrepancies that may reduce the property's value in either case.
If they find the property to be rightly evaluated and priced, they may share their report with the lender. And subsequently, you may receive your pre-approval for the loan.
Note that there's a catch here; CMA is not necessarily created by the agent. In fact, anyone can make a CMA.
So, if you wish to make your own CMA before going out in the market, here's how you can do it.
How to do a Comparative Market Analysis?
Depending upon your criteria, you may choose to compare your subject property with the sold ones in the past few months. Or you may also choose to compare your subject property with the active listings in the market.
Nonetheless, there are a few basic steps that you will need to follow.
- Narrow down your search
The first step is to narrow down your search. It means to narrow down on a specific area, region, or neighborhood.
For obvious reasons, a property that is close to the freeway won't be priced the same as one in the outskirts.
Ideally, you should stay as close to your subject property as possible.
2. Choose your criteria
Once you narrow down your search radius, the next thing you ought to do is find properties in the same category and size range.
For example, you wouldn't want to compare your 1,600 sq. ft. townhouse property with a 800 sq. ft. apartment.
But, you can still include a similar category to expand the scope of your analysis.
3. Select your comparables
Now, the next step would be selecting the comparables.
After narrowing down your search radius and deciding the criteria, you should have a list of properties with you. But you can't include them all.
Instead, you should further filter your search based on lot size, constructed area, number of bedrooms and bathrooms, and so on.
4. Calculate mean and median selling prices
Once you have a list of your preferred comparables, you can either use CMA software to prepare the report. Or you can do it manually in an excel sheet.
We recommend you use a CMA tool to simplify the report and eliminate any possibilities for error.
Nonetheless, it is still at your sole discretion how you wish to proceed, whether you want to use a paid tool or you want to put in your time and prepare it yourself.
So, now you know how CMA and property appraisal can help you make a better buying decision. We hope you use this information wisely and make a sounder decision.