This chapter focuses on comparative market analyses (CMAs), their use and what data should be collected prior to performing the analysis. Emphasis is placed on the difference between a CMA and an appraiser. Details are discussed about the appraisal process, the role of the appraiser and the different types of appraisals.

CHAPTER LEARNING OBJECTIVES

Upon completion of this chapter, the learner will be able to:• Explain the process of preparing a Comparative Market Analysis (CMA)• Describe what types of data should be maintained in-house and what external

data you will need and where to obtain it.

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CHAPTER 1

PREPARING A COMPARATIVE MARKET ANALYSIS (CMA)

Comparative Market Analysis - an Introduction

A residential real estate licensee typically uses only the sales comparison approach when valuing properties for a Comparative Market Analysis (CMA). However, the real estate licensee uses data from properties that are sold, sale pending, expired and currently on the market and compares this data to the subject property to derive a value. As with the appraiser, similar properties are compared to the site property and additions and subtractions and made to the site property for more or less amenities.

CASE STUDY CMA VERSUS AN APPRAISAL: Harlen, a licensed real estate, meets the Smiths at a party. Upon finding out that Harlen was a real estate licensee, the Smiths ask him to do an appraisal on their home so they can refinance. While Harlen can perform a Market Analysis on their home and estimate the sales price, he cannot perform an appraisal (which is a more detailed opinion of value and can only be performed by a licensed appraiser). Harlen should refer the Smiths to a certified appraiser.

Appraisal

What is an Appraisal?

An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. . Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms. The reasons for performing a real property appraisal are just as varied. They are usually required whenever real property is sold, mortgaged, taxed, insured, or developed. For example, appraisals are prepared for:

• Mortgage lending purposes• Tax assessments and appeals of assessments• Negotiation between buyers and sellers• Government acquisition of private property for public use• Business mergers or dissolutions• Lease negotiations

Uniform Standards of Professional Appraisal Practice (USPAP)

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CHAPTER 1 - SECTION 1

PREPARING A COMPARATIVE MARKET

Uniform Standards of Professional Appraisal Practice (USPAP) can be considered the quality control standards applicable for real property, personal property, intangibles, and business valuation appraisal analysis and reports in the United States and its territories. USPAP, as it is commonly known, was first developed in the 1980s by a joint committee representing the major U.S. and Canadian appraisal organizations. 

While USPAP provides a minimum set of quality control standards for the conduct of appraisals in the U.S., it does not attempt to prescribe specific methods to be used. Rather, USPAP simply requires that appraisers be familiar with and correctly utilize those methods which would be acceptable to other appraisers familiar with the assignment at hand and acceptable to the intended users of the appraisal. USPAP directs this through what is called the Scope of Work rule. At the onset of an assignment, an appraiser is obligated to gather certain specified preliminary data about the project, such as the nature of the property to be appraised, the basis of value (e.g. market, investment, impaired, unimpaired), the interests appraised (e.g. fee, partial), important assumptions or hypothetical conditions, and the effective date of the valuation. Based on this and other key information, the appraiser relies on peer-reviewed methodology to formulate an acceptable work plan.

Appraiser Institute

The Appraisal Institute is a global professional association of real estate appraisers, with nearly 21,000 professionals in almost 60 countries throughout the world. Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide.

Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Individuals of the Appraisal Institute benefit from an array of professional education and advocacy programs.

Appraisal Institute Designated members have met rigorous requirements relating to education, testing, experience and demonstration of knowledge, understanding and ability. Those individuals holding the Appraisal Institute’s MAI and SRPA designations are experienced in commercial valuation, including industrial, retail and multifamily properties. Those holding the SRA designation are experienced in residential valuation. All Appraisal Institute professionals adhere to a strictly enforced Code of Professional Ethics and Standards of Professional Appraisal Practice.

For more than 80 years, the Appraisal Institute has been the world’s leading organization of professional real estate appraisers. The organization has led the way in fostering and promoting the highest standards of practice through its designation programs, peer review process, education, research and publishing endeavors.

The Appraisal Institute offers an extensive curriculum of introductory and advanced courses, as well as a wide range of seminars on specialty topics. These programs are designed to address the needs of all real estate appraisers, ranging from those just entering the profession and earning credit toward state licensing or certification, to seasoned practitioners who wish to keep abreast of the latest techniques and developments. Many of these programs also serve

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to help other industry professionals gain further insight and understanding of real estate valuation techniques and processes.

Categories of Appraisers

Appraiser Trainee:Someone who is qualified to appraise those properties, which the supervising certified appraiser is qualified to appraise.

Licensed Real Property Appraiser:Someone who is qualified to appraise non-complex one to four units having a transaction value less than $1,000,000 and complex one to four residential units having a transaction value less than $250,000. This classification does not include the appraisal of subdivisions.

Certified Residential Real Property Appraiser:Someone who is qualified to appraise one to four residential units without regard to value or complexity. This classification does not include the appraisal of subdivisions. To be a state certified residential appraiser qualified to do appraisals for federally related transactions, a state must have requirements that meet or exceed this minimum standard.

Certified General Real Property Appraiser:Someone who is qualified to appraise all types of real property. To be a state certified general appraiser qualified to do appraisals for federally related transactions, a state must have requirements that meet or exceed this minimum standard.

A real estate appraiser is a certified professional who specializes in estimating the value of property. Estimates of value, known as appraisals are typically made when property is bought, sold, condemned, insured or mortgaged. An appraisal may also be performed in a pending divorce action and when partnerships are terminated.

A lender will almost always require an appraisal to insure that the value of the property is sufficient collateral for the loan. The appraisal is ordered by the lender and even though the borrower usually pays for the appraisal, the lender is the party that owns it. The appraiser works for the lender and not the borrower.

Most appraisals for residential real estate are completed using the market data approach where comparable properties are used to determine value.

If the appraised value is less than the sales price, the borrower may be asked to increase their down payment.

CMAs

When preparing a Comparative Market Analysis (CMA) there are certain data that might be kept “in house” and certain data that might be obtained externally. This data can be invaluable as part of your CMA package. Let’s explore both categories and where you might obtain this data.

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Market Conditions

Market conditions play an important role when preparing a Comparative Market Analysis. There are some specific considerations when analyzing the current market conditions:

• General State of the Economy – this might include inflation, unemployment, the stock and bond markets etc.

• The Availability of Money - types of loans being offered and interest rate• Competition – the amount of homes, both resale and new construction that are currently

on the market• Supply and Demand – If there is a plentiful supply and low demand, prices tend fall.

Conversely, if there is a low supply and high demand, prices tend to rise.• Consumer Confidence – consumer confidence in the economy, elections, employment, the

stock and bond markets etc. play a huge role in market conditions in real estate.

Markets

Supply and Demand

In real estate, the supply is real property (houses, land, multi-family, industrial, commercial and agricultural). The demand is the pool of buyers. Each type of property and each geographic region have their own market dynamics. Industrial real estate and residential real estate do not closely correlate with each other; neither do residential markets dynamics in North Dakota and Seattle.   

If there is a plentiful supply and low demand, prices tend to fall. Conversely, if there is a low supply and high demand, prices tend to rise.

Market conditions play an important role and affect supply and demand such as:• General state of the economy – this might include inflation, unemployment, the stock and

bond markets etc.• The availability of money - types of loans being offered and interest rate• Competition – the amount of homes, both resale and new construction that are currently

on the market• Consumer Confidence – consumer confidence in the economy, elections, employment, the

stock and bond markets etc. play a huge role in market conditions for real estate.• Zoning - The primary purpose of zoning laws are to segregate uses that are thought to be

incompatible with other uses and to prevent new development from harming existing businesses or residents. Zoning is commonly regulated through local government such as counties or municipalities, and could include one or more of the following:

• Use (residential, commercial, industrial, agricultural, open space use)• Density (example of a high-density use would be a multi story high-rise)• Height of buildings and the amount of space that the structure may occupy• The location of the building on the lot (setbacks from the street or other boundaries)• How much landscaped space and how much paved space (parking)

All of the above affect the usage and kind of structure that can be built on a property. Any restriction on the use of property can have an effect on supply and demand.

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Hot Real Estate Markets

A hot market is a seller’s market.

A market is said to be “hot” when there are short marketing times, multiple offers, escalation clauses and properties often selling over the list price. Even though it’s buying activity causing this market, a hot market is a seller’s market because sellers have the upper hand in negotiating power.  Signs of a seller’s market include:

• Properties selling above list price.• Less inventory on the market as compared to previous months and years. • Less than five months of inventory.• Comparable sales prices are lower than active listing prices (prices are rising).• More buyers, resulting in a higher number of closed sales.• Quicker sales (fewer days on market).• Multiple offers and escalation clauses

Buyers create hot markets. If all the sellers decided to market their homes all at once, it would result in falling prices due to over-supply. It takes an increase in buyer activity (an increase in demand) to create a hot market.

While sellers do not create hot markets, they gain the benefits in that there are:• An increased number of buyers• More offers• Often times multiple offers and escalation clauses• This often means higher prices and a shorter marketing time.• Properties selling above list price.• Fewer inventory on the market as compared to previous months and years. • Less than five months of inventory.• Comparable sales prices are lower than active listing prices (prices are rising).• More buyers, resulting in a higher number of closed sales.• Quicker sales (fewer days on market).• Multiple offers and escalation clauses

Lower inventory levels and hot markets go together.Supply and demand applies here: fewer available properties means an increased demand from buyers. Increased demand results in higher prices and multiple offers. Inventory levels will be reduced in a hot market.

Appraisals in a Hot Market

In a seller’s market, the sales price might be limited by the lender, not the buyer. Lenders base loan amounts on appraisal price.

Appraisals are a consideration in a market trending upward. Approximately 13-15% of transactions either die or are renegotiated based on appraisals in a hot market.

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A lender won’t loan above appraised value. This means that the buyer must either come up with the difference between sales price and appraised price in cash or negotiate a lower sales price. This may be tough if there are competing offers.

In a hot market, a property might have six competing offers. This doesn’t mean that the bank will lend on the highest price because of appraisals. A bank may be reluctant to lend on properties that are considerably above the prices that comparable houses sold for. Appraisers tend to lag behind the market.

EXAMPLE:A property goes on the market for $725,000 and receives an accepted offer of $730,000. An appraiser uses comparables from 4 months previously that show appraised value for the home at $700,000. However, property values are increasing at 2 percent per month. The home may actually have a market value of $756,000 or more. The appraiser may have a difficult time justifying this price.

Appraisals are seldom overruled. You could ask for a second appraisal (at an additional cost), or switch lenders (again at an additional cost), but there is no guarantee that the second appraisal will be higher than the first. And some lenders won’t consider a second appraisal, even if the buyer pays for it, unless there is an obvious error such as incorrect square footage, an incorrect number of bedrooms or bathrooms. Before you challenge an appraisal, make certain you’ve done your homework and approach with facts and a CMA.

When Properties Don’t Appraise

When properties do not appraise at or above their sales price, the buyer and seller have the following options:

• Cancel the transaction, and return earnest money to the buyer (providing an appraisal contingency is part of the purchase and sale agreement)

• The buyer increases their down payment • Seller reduces the sales price• Some combination of sales price reduction and buyer increasing the down payment• Order another appraisal, hoping for a better outcome (not suggested)

EXAMPLE #1:

Mr. and Mrs. Karmen listed their property for $450,000. There were multiple offer (3 of them) and the Karmens accepted the highest offer at $475,000. The appraisal on the property came in at $445,000. The Karmens agreed to reduce their price to $445,000 (the amount of the appraisal).

EXAMPLE #2:

Mrs. Jansen listed her property for $775,000. There were multiple offers (5 of them) which resulted in Mrs. Jansen accepting the highest offer of $890,000. The appraisal on the property came in at $850,000. The buyers agreed to pay the difference, in cash, of the appraisal price ($850,000) and the agreed upon sale price ($890,000). The buyers paid $40,000 additional in cash.

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Service Providers in a Hot Market

As well as real estate brokers, settlement service providers are also busier than usual. Service levels may decrease and responsiveness may slow. Lenders may get backlogged in processing loans and underwriting may take longer to assess and approve loans. These are important considerations when writing offers. When considering the close date, make sure you have given enough time for other service providers to do their job.

Example of service providers would include: • Lenders• Loan processors• Underwriters• Structural inspectors• Specialty inspectors• Title companies• Escrow companies• Building and repair contractors• Insurance agents• Home warranty companies

EXAMPLE #1:

Jim, an agent for the buyer, was writing a purchase and sale agreement. In a stable market, the closing time (escrow period) would normally be 30-45 days. Because this was a hot market both lenders and closing agents were back logged. He wrote into the contract a closing date 60 days into the future. This could help avoid a situation where the buyer would have to ask for an extension of closing if the loan documents or the closing agent had any delays.

NOTE: ON AN EXTENSION OF CLOSING, BOTH THE BUYER AND THE SELLER MUST AGREE, IN WRITING, TO THE EXTENSION.

EXAMPLE #2:

John, an agent for the buyer, was writing a purchase and sale agreement. It was a hot market and structural inspectors were in high demand. He submitted a structural inspection contingency giving the buyer 10 days to perform a structural inspection. In a stable or cold market he may have normally given the buyers 5-7 days to perform a structural inspection.

Hot Markets and Cash Buyers  

In a hot market, more buyers pay by cash, which can give them a strong advantage in multiple offer situations. An offer from a cash buyer will be much stronger than one from a buyer who requires financing. The reasons are:

• No issue with the buyer not qualifying• No waiting for lender and underwriting approval means a faster close• No loan documents to be concerned with

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• Unless the cash buyer specifically asks for an appraisal contingency, there is no issue with an appraisal

There are two distinct groups of cash buyers - owner occupied homeowners, and investors.

Buyers who intend to live in the home will often offer cash in a hot market to make their offer more attractive.

An investor could possibly plan to remodel and re-sell a property at a profit or hold it and sell later is not usually as concerned about the appraised value. The investor may have already done their analysis regarding value and considers the asking price to be fair. Most cash buyers have been investors.

Sometimes buyers don’t intend to keep all their cash in the home and plan to refinance after the sale closes. This allows them to pull their equity out of the property and replace funds borrowed from other sources to make the attractive cash offer.

NOTE: The main difference between investors and owner occupied buyers is that investors are usually looking at the numbers (the bottom line), while owner occupied buyers are usually more interested in livability.

Hot Markets and Pocket Listings

With inventory levels low, many licensees may be to tempted to take pocket listings.

“Pocket listing” is a situation where the real estate broker purposely keeps information about the subject property from the MLS. With the up-turn in the housing market, pocket listings are a growing concern across the country from New York to California and all points in between in the industry. The practice of pocket listing lets the firm’s brokers know about the listings, alerts the brokers’ buyers and posts the information on various social websites without exposure through the local MLS database.

Many Multiple Listing Services across the country have made pocket listings a violation of their local rules and regulations. You should check with your local MLS prior to dealing with a pocket listing. Key issues in dealing with them are legal issues, potential liability and market impact on our industry.

A pocket listing limits market exposure (especially those that are not posted to any formal websites) for a property and instead concentrates promotion of the property among a select few. This may very well be a disservice to the seller(s). These select few who might know about the listing might include:

• The listing broker• The affiliates of the brokerage where the listing broker works• The listing broker's pool of current buyers• Friends of the listing broker

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NOTE: If you consider marketing, websites and MLS in terms of an auction. The more people at your auction, usually the prices will be higher. Having a pocket listing may be doing a disservice to the seller.

Stable Real Estate Markets

In a stable market interest rates are usually affordable and the quantity of sellers and buyers in the market is usually close to equal.

Stable markets usually show:• Comparable sale prices are close to the list prices.• Normal inventory as compared to previous normal months or years.• Sales prices are flat.   • Time on market is average, historically, for any given area. 

Cold Real Estate Markets

A cold market is a buyer’s market.

Sellers usually are more willing to negotiate when there is a cold market. This means that buyers can often purchase a property for less than the asking price. Sellers may be willing to make concessions such as paying some of the buyer’s closing costs and give credits for items such as paint, upgrades or carpet replacement.

Indications of a cold market are:• Inventory is higher than usual• Comparable sale prices are higher than asking prices.• Sales prices are declining• Fewer buyers are purchasing and fewer closings• Properties remain on the market longer.

In a cold market, the negotiating power rests with the buyer. Buyers can often make lower priced offers, and negotiate other favorable terms and conditions.

Local Markets Matter the Most - Make Sure You Understand Your Market

The local market can be influenced by:• Population increases or decreases• Demographics • Availability of housing• Tourism• Income levels• Major employers moving into or out of the area• Employment levels• Local tax rates• Local building and zoning restrictions

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The following are some tips for your keeping abreast of your local market: • Read local newspapers and blogs• Attend industry functions• Attend open houses and broker open houses• Visit listings in your area• Network with other brokers and industry people• Join the Chamber of Commerce • Attend office sales meetings • Read “hot sheets” from your MLS for the areas you work in• Attend local events when economists and other experts are present.• Attend local neighborhood association meetings• Volunteer in the community• Talk with other service providers about the market

Internal Data – external data can be obtained through the following resources:• School Systems – school systems can be extremely important to potential buyers.

Information such as the school names, special education programs, sports and test ratings can be found from the local school district. Your local MLS and title company may also have data available to you.

• Transportation – information on local transportation such as (bus lines, light rail, trains and access vans for seniors and the disabled can be obtained through your local transit system.

• Crime Statistics – information on crime in a local area can be found through your local police precinct.

External Data – external data can be obtained through the following resources:• Local Chamber of Commerce – may provide information on shopping, local business, city

services, places of worship, farmer’s markets, local events, historical sites, recreational sites etc.

• Title company – a title company can provide information on property history, current property profile, preliminary title reports, etc.

• City website – can provide information on utilities, public safety, transportation, the climate, arts and recreation, employment, human services, cultural heritage, community development, youth programs and events, public health, animals and pets, translation services, boards and commissions etc.

Summary

This chapter contrasts the difference between a CMA and an appraisal. Specific data required to perform each are discussed. A summary of market conditions and their effect on value is explored with an emphasis on consumer confidence in the economy and an explanation of hot, cold and stable markets.

Check your understandingUse this link to open a short quiz:https://www.bookwidgets.com/play/JSEBC

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