Comparative Market Analysis
The comparative market analysis is the most commonly used appraisal method in residential real estate.
The purpose of this method is to determine the appraised value of the subject property.
The formula for figuring out this value is as follows: The value of the comparable property, plus or minus the adjustments made to it.
You start by establishing what the subject property is and what it has. For example, a two story home that has 1,000 square feet on the main floor, second floor, and the basement, has a total of 2,000 square feet above-grade and 1,000 square feet below-grade.
Then look at the number of bedrooms and bathrooms and any other amenities the property has. This is the difficult part because what is considered an amenity to one person might not be one for someone else. For example, being two doors from an elementary school is great if you have three elementary age children, but it is not as important to someone whose children are grown.
The three main criteria an appraiser uses to compare are:
- The date of the sale of the comparable- An appraiser will usually only go back six months and then adjust for any other time. However, the appraiser must consider the market condition. They have to figure out which way the market is going and if there is any consideration for the season.
- The proximity of the comparable to the subject- Although an appraiser usually only goes out about a mile, this is where local expertise comes into play. They will use natural boundaries such as I-215. If the subject property is within a few blocks of the highway, they typically will not go on the other side of it, even if it is within a mile.
- The similarities of the comparable to the subject- An appraiser will consider the type of home, the ratio of above-grade footage to below-grade footage, the location, etc. For example, a property located on a busy street is difficult to compare to a property two blocks away at the end of a cul-de-sac with a park in the backyard.
After accumulating comparable sales, you need to go through the adjustment period.
When comparing and adjusting, never adjust the subject. You only adjust the comparable so that it matches the subject.
For example if the subject property is a four-bedroom house, and the comparable that sold was a five-bedroom house, you need to adjust the comparable down by a predetermined amount for a bedroom (typically around $1,000). If this is the case, you subtract $1,000 from the comparable to adjust it down to four bedrooms. *Note that the square footage needs to be adjusted as well*
This method is used all the way down the list of items to come up with an adjusted value.
Click here to see an example of a CMA. In the example, the adjusted values are averaged and then the average is assigned to the subject property as the appraisal value.
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