What is a CMA and Why Do I Need One?

Quite simply, CMA is an acronym for Comparative Market Analysis.  It’s a consideration of comparable property sale values.  CMAs are important, and every home buyer and seller should know about them.  Why?  In short, to save you money.

The CMA is the single most important tool available in pricing a home.  I have written extensively about how important it is for sellers to price their homes appropriately out of the gate.  In today’s post, I will be focused on the buyer, for whom it is equally important to understand relative market value, especially in this unpredictable, pandemic driven market.  

Home shoppers, I get it – inventory is limited, you want to take advantage of historic low interest rates while you can and you can’t stand living in the boroughs any longer.  Here’s the thing…sellers are smelling the desperation and naming their price, the sky being the limit of course.  You find yourself salivating over the same turn-key, updated dream house that just came on the market and has multiple offers, and your trigger finger starts to get very itchy.  You turn to your real estate agent and ask, “how much should I offer?”  Now here is the very sad news.  Your real estate agent will more than likely say “go in at asking price.”  Why would he/she say this?  Because they know that it will go for asking or above.  They know that in this market, you have to go strong or go home.  They are not wrong.  Why is this sad?  Because sellers, as I mentioned, are naming their prices and ignoring CMAs.  They are completely disregarding what houses previously sold for within the past year, because they know there aren’t many options, you are desperate and will pay whatever they ask.  I’m not saying this happens in all cases, but even the appropriately priced homes are having bidding wars with offers well north of market value.

Now, I am a firm believer that value is in the eye of the beholder, and that market value is defined by the price the consumer is willing to pay (in fact, that IS the technical definition).  However, it’s all fun and games until Johnny Appraiser comes around and poops on the party with a sobering valuation.  It’s unfortunate, but appraisers pay no mind to what you or the seller think the house is worth.  Fannie Mae and Freddie Mac have guidelines by which appraisers must abide.  They live in the past with little care that a market is on the incline, and they base their valuations on comparable sales from the past 6-12 months.  And they don’t care that Susie seller put $100k worth of improvements into her home and wants every penny back for them.  Buyers will offer a considerable premium for a home that has all the bells and whistles. Appraisers are not so generous. The most they will adjust for condition against a home in inferior shape is 10%, and it would have to be in mint condition, and the inferior a gut job, to get the full adjustment.  When a house under-appraises, the buyer is left with three choices: 1) renegotiate, if the seller is willing, 2) come up with the difference in cash, or 3) walk away from the deal minus expenses and costs related to home inspection, appraisal and, in some cases, attorney fees.  If the seller IS willing to renegotiate, they are normally looking to “split the difference” – meaning, if the house appraises $20k under asking, for example, they will expect the buyer to fork over an additional $10k to make the deal work.  It’s all well and good if you have cash to spare, but problems arise when you are putting 5% down and saving every spare dime for closing costs.  And if the seller won’t budge on price, then you may simply have to move on, having just wasted considerable time and money.  As you can imagine, it can be quite devastating to have your housing bubble burst by a low appraisal just when you’re picking out paint colors and giving your landlord notice.   

Let’s say you are totally OK with overpaying. You’re putting 20+% down on the house, and the appraisal doesn’t really affect you.  Great.  However, let’s say next year the economy isn’t looking so hot and unforeseen circumstances put you in a position where you have to sell.  What then?  You’ve lost value on your house and, because you’ve overpaid to begin with, that loss is exacerbated.  Not a good spot to be in when the market shifts, as many people who’ve sold during the crash can tell you.  #shortsale

So if sellers are ignoring CMAs, it’s high time buyers ignored their own emotional impulses and started considering market value.  When you’ve found a house you are hot and heavy on, take a moment, count to 10, and ask to see a market analysis (also known in our industry as “the comps”).  Any buy-side real estate agent should be able to provide a CMA report with comparable properties (similar square footage, bedroom count, style, year built, acreage, same school district, etc.) and a basic pricing analysis.  Top notch agents will provide a detailed breakdown of pricing adjustments to account for differences in amenities and features, similar to that of an appraisal.  If you are bidding on a home and your agent refuses to provide even a basic CMA, RUN.  Find yourself another agent.  And if you are going directly to the listing agent without buy-side representation, then you must understand that the listing agent has a fiduciary to his/her seller and should not be expected to provide this.  In that case, you must either find a way to do your own research, or find a good agent to assist and represent you.

The bottom line, and the reason I am writing this post, is that I am seeing more and more agents disregarding housing value and encouraging bidders to pay whatever asking price is on the table.  I can name at least 5 different instances in the past week alone in which I’ve personally witnessed this happen.  I’ve even had listing agents admit to me that they know for a fact the home will not appraise anywhere near the seller’s crazy asking price, but end up with accepted offers at asking nonetheless.  This is negligent practice on the part of buyer agents.  A buyer agent has a fiduciary obligation to represent the client’s best interests.  I’m sorry, but failing to educate the buyer on supported market value when bidding on homes is a clear breach of this fiduciary.

In short, make sure you get a CMA.  Pricing guidance is a service that any quality buyside agent should provide to their buyer.  Know thy rights!  Additionally, be armed with the comps in advance of making an offer.  It’s much easier to go up than it is down in negotiations, so don’t wait until your offer is accepted to evaluate whether or not you’ve overbid, else you will be in for quite the awkward situation.  Know before you go!