RE62RC25: Comparative Market Analysis (CMA)

Objective: Learn how to prepare a Comparative Market Analysis (CMA) and clearly explain its value and limits to clients.

1. Definition of CMA
   1. A CMA is an unbiased estimate or opinion of the market value of real property by a real estate licensee who is not a licensed or certified appraiser. The valuation techniques used are similar to the three approaches to value employed by a licensed or certified appraiser.
   2. Valuation Methods
      1. CMA referenced as (interchangeable terms all in common usage):
         1. Comparative Market Analysis
            1. Competitive Market Analysis
            2. Comparable Market Analysis
      2. Broker's Price Opinion (BPO)
      3. Market Analysis
      4. Opinion of Value
      5. Automated Valuation Model (AVM)
   3. The Three Approaches to Value
      1. Market Data Approach or Sales Comparison Approach:
         1. Identify properties with the same 'highest and proper use' that have sold recently (usually within the last six months). Must be an "arms-length" transaction.
            1. Excluded would be conveyances such as 'short sales', bankruptcy or foreclosures or sales between relatives, etc.
            2. Adjustments between subject property and comparables for significant differences such as location, physical characteristics, etc.
            3. Similarities generally should be in the bathrooms, bedrooms, number of rooms, building age, style of house, condition of property, and lot size.
            4. All comparable information should be reconciled and a value should be 'estimated'.
      2. Cost Approach or Replacement Cost Approach:
         1. Cost approach is based on the property's replacement cost.
            1. Add together the building and land value (each computed separately).
               1. Estimate the replacement cost of the building new.
               2. Deduct all accrued depreciation from the replacement cost.
               3. Add the estimate land value to the depreciated replacement cost.
      3. Income Approach:
         1. Income approach is determined by the amount of net operating income the property will produce over its remaining economic life.
            1. Steps to estimate by Income Approach
               1. Estimate the potential annual gross income.
               2. Adjusted Gross Income - Deduct an allowance for vacancy and collection loss.
               3. Net Operating Income (NOI) Deduct all annual operating expenses of the property from Adjusted Gross Income.

NOTE: debt service and depreciation are not considered operating expenses for Income Approach, as they do not affect value.

1. Apply the appropriate capitalization rate to the Net Operating Income. (NOI ÷ Cap Rate)

   1.  Comparative Market Analysis (CMA) when using the Market Data Approach

      Properties recently sold that are similar to a particular property used to indicate a value for the subject property.

      1. The more recent the sales and the fewer dissimilarities, the better the comparable.
      2. It is best to use properties in the same neighborhood so seller can easily relate.
      3. Also considered are homes on the market listed for sale but that have not sold (active).
      4. Listing expired or withdrawn.
      5. Listings under agreement.
   2. Some uses of a CMA
      1. A sales agent as a listing tool to show a seller what their property should be priced at.
      2. Assists a licensee to decide if they want to accept the listing or not.
         1. If a seller wants more than the CMA indicates, sale agents may reject the listing.
         2. The greater the similarity, the more accurate the CMA and the more likely the seller will accept the estimate of value.
      3. Necessary for appraisers to set value for mortgage for borrowing purposes.
      4. Establish value of real property in an estate.
      5. Establish value of real property in a bankruptcy.
      6. Establish value in an exchange of real property.
      7. Establish value for a foreclosure or short sale.
      8. Employed by mortgage lenders to verify values.
   3. Massachusetts Appraisal Licenses
      1. Types of Appraisal Licenses:
         1. Real Estate Trainee
         2. State-Licensed Real Estate Appraiser
         3. State-Certified Residential Real Estate Appraiser
         4. State-Certified General Real Estate Appraiser
   4. Discussion/Questions
      1. Who is eligible to do a CMA?
      2. What happens if there are no comps available?
      3. What does real estate licensee do if mortgage appraiser's appraisal comes in below sale price?
      4. How detailed would a CMA be from a listing agent?
      5. A licensee may or may not charge a fee for a CMA
      6. Licensees must never imply they are a licensed or certified Appraiser
      7. Role and appropriate use of AI in determining value.

Sources:

• Local MLS
• Registry of Deeds
• Bankers and Tradesman
• Local Assessors office