Comparative Market Analysis

A comparative market analysis is a written estimate of the price at which a property would probably sell, prepared by a real estate licensee from the sale prices of comparable properties, adjusted for the ways those properties differ from the subject. Its ordinary use is pricing: a seller deciding what to list for, or a buyer deciding what to offer. It is not an appraisal, it is not prepared by a licensed or certified appraiser, and no lender relies on it to set the amount of a purchase mortgage.

The naming is worth setting out, because the same document travels under two names and only one of them appears in federal law. "Comparative market analysis" is what the industry calls it when a broker prepares it for a seller or a buyer. When a lender, servicer or investor orders the same kind of estimate, it is ordinarily called a broker price opinion, and that phrase is defined by statute. Note also that the abbreviation "CMA" is not exclusive to real estate: in banking and brokerage it commonly means a cash management account, which is an unrelated product.

The statutory definition is a description of a comparative market analysis. 12 U.S.C. 3355(b) provides that "the term 'broker price opinion' means an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property's condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model, as defined in section 3354(c) of this title." Every element of that sentence describes what a listing agent produces for a seller. What differs between the two names is who ordered the document and what it will be used for, not what it is.

And the use is what the statute regulates. 12 U.S.C. 3355(a) provides that "[i]n conjunction with the purchase of a consumer's principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property." So a seller may price a house from a broker's estimate all day long; what may not happen is a lender treating that estimate as the primary basis of value when originating the purchase loan. The prohibition is limited on its face: it is about a purchase of a principal dwelling and about a loan origination, which is why broker price opinions remain common in servicing and in loan-portfolio work.

The rest of the line is drawn by the banking agencies rather than by that section. Under 12 CFR 34.43(a)(1), "[a]n appraisal performed by a State certified or licensed appraiser is required for all real estate-related financial transactions except those in which… [t]he transaction is a residential real estate transaction that has a transaction value of $400,000 or less." Exemption from the appraisal requirement is not exemption from valuing the collateral: 12 CFR 34.43(b) requires the institution in those cases to "obtain an appropriate evaluation of real property collateral that is consistent with safe and sound banking practices." A useful way to hold the three together is that an appraisal is a regulated opinion by a licensed professional, an evaluation is a lender's own supportable estimate where an appraisal is not required, and a comparative market analysis is a marketing document that may inform either without being either.

The method is comparable sales, and the adjustments are the whole exercise. The preparer selects recent sales of properties similar in location, size, age and condition, then adjusts each sale price up or down for the ways it differs from the subject: a comparable with a garage the subject lacks is adjusted down, a comparable smaller than the subject is adjusted up. What emerges is a range rather than a number. Two competent people can produce different figures from the same three sales because they chose different comparables or valued the differences differently, which is a reason to read the adjustments rather than the headline. It is also why the analysis is more useful in a neighborhood of similar houses that trade often than in one where nothing comparable has sold recently.

Reading one as a seller. The analysis is prepared by someone seeking or holding the listing, which is a fact about the document rather than an accusation. The way to use it is to look at what was chosen and why: how recent the sales are, how close they are, how similar the properties really are, whether any of the comparables were unusual sales, and whether the adjustments are explained or merely applied. An analysis that shows its working can be argued with. One that produces a single confident number cannot.

The preparer identifies the subject property's characteristics, selects recent sales of comparable properties, adjusts each sale price for differences between that property and the subject, and reasons from the adjusted figures to a price or a range. Active listings and expired listings are often shown alongside, since they indicate what the subject would be competing against and what the market has already declined to pay.

A hypothetical adjustment grid. The subject is a three-bedroom, two-bathroom house of 1,850 square feet with no garage.

Comparable A sold for $412,000 and has a two-car garage the subject lacks, so it is adjusted down by $12,000 to $412,000 − $12,000 = $400,000. Comparable B sold for $398,000 and is 150 square feet smaller, so it is adjusted up by $9,000 to $398,000 + $9,000 = $407,000. Comparable C sold for $427,000 and has a finished basement, so it is adjusted down by $22,000 to $427,000 − $22,000 = $405,000.

The three adjusted figures are $400,000, $407,000 and $405,000, averaging ($400,000 + $407,000 + $405,000) ÷ 3 = $404,000. The number is the easy part. Every one of the three adjustments was a judgment, and moving the basement adjustment alone by $10,000 moves the average by more than $3,000, which is why the grid is the part to read. Figures are invented for the illustration.

Pros

• It is the ordinary way a list price gets set, and it is grounded in what similar homes actually sold for rather than in what anyone hoped for.
• It is fast and normally provided as part of the listing conversation.
• It shows the competition, because active and expired listings can be included alongside completed sales.
• Reading the adjustments teaches a seller more about their local market than any single figure will.

Cons

• It is not an appraisal, and federal law bars this kind of estimate from being the primary basis of value when a lender originates a purchase mortgage on a principal dwelling.
• No licensed or certified appraiser stands behind it, and the preparer is rarely a disinterested party in the listing decision.
• The adjustments are judgment calls, so the same three sales can support materially different conclusions.
• It degrades where comparable sales are thin, unusual or stale, which is exactly where a seller most wants a number.
• The abbreviation collides with an unrelated banking product, which makes searching for guidance about it unnecessarily confusing.