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4 Valuation Factors To A Competitive Market Analysis
Agents use 3 main ways towards valuing property:
- Broker price opinion
- Competitive market analysis
This can be child’s play when you compare that to the flurry of valuation models that hardcore real estate investors are used to.
However, for the scope of work agents deliver for their services, these approaches are often sufficient to serve the needs of their clients.
An appraisal basically refers to an appraiser inspecting a property and putting an appraised value on it. This is often used by lenders as a variable towards working out a loan-to-value.
A broker’s price opinion (BPO) concerns having an agency assess and estimate the value of a property. A common reason when BPOs are required is when a bank is considering approving a short sale.
A competitive market analysis (CMA) is what agents work with most regularly to provide pricing information for their clients.
It is basically a method of arriving at a market value of a property based on review and study of 4 key areas in the dynamic market place.
1) Sold properties
As the term suggest, this refers to pricing information of transactions that have occurred.
Closing is done. Ownership has been transferred. And money has changed hands.
Because buyers and sellers have landed on an agreed fair value to transact at, this is a figure that is the most concrete when analyzing real estate markets.
And it should be one of the mail pillars towards any valuation model.
There’s a lot of information that can be extracted from sold properties. Including but not limited to:
- Original asking price
- Final price
- Time on market
- Number of agents changed
Because real estate markets move dynamically, records of sold properties in the most recent 6 months will present a fair representation of the current market trends. Anything exceeding that will hold little weight towards CMA.
2) Pending properties
This refers to houses that have been agreed for sale between buyers and sellers.
Meaning the buyer has secured the deal. Yet the transaction has yet to be fully closed.
There can be various reason for delays up to 60 days to occur leading to pending properties.
Sometimes, buyers just need more time to conduct due diligence checks. Sometimes a serious problem like a foundation issue has been discovered after home inspection and it needs to be rectified before the buyer would proceed. Or sometimes it can be the little issue of the buyer having cold feet.
Information tabulated from pending properties has a lower priority compared to sold properties.
This is due to the simple truth that anything can still happen before closing. It is not uncommon for buyers to walk away from a deal after uncovering grave issues about the property. Or maybe the buyer was just unable to obtain required financing to finalize the deal.
Another point to note is that prices stated on pending properties are often not the final transaction price.
This is because it is based on the seller’s initial asking price. And as we all know, deals seldom close without any negotiation that results in a movement away from the asking price.
If a particular pending property is very similar to one that you are working on, consider contacting the agent for information.
However, do note that the information you can obtain is limited due to fiduciary obligations.
3) Active properties
Active properties refer to properties are that currently available on the market.
This is often the main source of pricing information that a buyer or seller base their research around. Simply due to it’s availability.
Sellers would instinctively want to price their homes as high as they can to comparable homes. While buyers would look for lower priced homes as a measuring stick.
As an agent, it is your job to manage a client’s expectation. Nobody will win in the relationship when customers have unrealistic expectations that cannot be satisfied.
Above all, information in this section is a good gauge on how competitive the current market actually is.
Are sellers undercutting each other?
Is it a sellers market?
Are asking prices going down?
Again, a point not to forget is that listed prices are often not the final transaction price agreed by both buyer and seller.
4) Expired listings
This shows the properties that had been put on the market and ended up unsold.
The most common reason for houses to end up in this category is due to unmotivated sellers.
Often times, sellers do not have a desperate reason to sell. They are just testing the market to see how much their house can actually fetch. And if they are able to receive a killer offer, they might consider letting it go.
This segment is a great way to subtly communicate to sellers not to overprice their homes if they truly want deal to go through.
The CMA is an essential part of client relations if you intend to impress them. Often times, clients will find these reports insightful and very helpful.
A good agency should have software that generate these reports for their agents. If not, third party services are readily available at a reasonable subscription fee.