A home appraisal that utilises a comparative market analysis (or CMA) is one of the best tools a homeowner can have to understand what their house is worth before they go to market.
Loaded with comparable sold and currently listed properties and market insights, a CMA can provide a snapshot of what to expect and help homeowners make smart decisions on whether it’s time to buy, sell, invest or wait.
However, in certain situations they may not accurately represent the market and can even mislead. Therefore, it’s important for homeowners to be aware of the potential shortcomings of some home appraisals and how to spot them.
New to home appraisals and property research? Read more here.
The importance of relevant comparable homes
As part of an appraisal, the real estate agent providing the report will provide a list of comparable homes that have recently sold, as well as those currently on the market in your immediate area. These comparable homes form the basis of a CMAs price estimate. Herein lies a potential weak point: if the comparable properties lack similar characteristics to the property in question, then it could result in a skewed price estimate.
“If you don't have good data to start with, then you can't trust the results of that information because it has no factual basis,” says Jeremy O’Rourke, Managing Director of Lodge Real Estate. “Poor information makes it a lot harder to make good decisions.”
What makes a home comparable?
In order to give an honest appraisal, agents must ensure that the comparable properties they use in their CMA are relevant to the subject property.
To be considered relevant and comparable a property must:
- Have the same type of title.
- Be of similar size and construction type.
- Have similar attributes (i.e. number of bedrooms and bathrooms).
- Ideally be in the same neighbourhood (more on this later).
- Have sold within the last few months (preferably no more than three).
Where CMAs can lead homeowners astray
Sold comparable homes vs currently listed
While sold homes can indicate market value, currently listed comparable properties do not. Until they are sold they are only speculating on what the seller thinks their property is worth. They may end up selling below their listed price, especially in a buyer’s market.
A rapidly changing market
The Hamilton property market has gone through recent and, in some cases, rapid change. It’s important that property owners understand that during these periods an appraisal may not reflect the rapid change in the market—especially if you choose to hold off putting your property on the market after your initial CMA.
For example, when the Reserve Bank removed loan-to-value restrictions following the COVID-19 lockdown in 2020, the housing market fired up as investors returned to the market to take advantage of the removed LVRs and low interest rates. As a result, properties that were more suited to investors (e.g. stratum in freehold titles) likely sold at higher values than their CMAs would have indicated. However, the property market is often volatile. An article in the media or a change in interest rates can spook buyers, just like the 2016 loan-to-value changes did. Suddenly there’s no longer the same number of people interested in investing, which leads to less competition among buyers. Prices might level, or even decrease, particularly if there’s an increase in stock at the same time there is a decrease in demand.
“That's where a salesperson and their experience and understanding of their local market conditions is really important,” says Jeremy O’Rourke. “A CMA combined with the skills and knowledge of a local agent can help a property owner determine, as accurately as possible, where their property is going to sell.”
Lack of sales data
In some cases, a lack of sales data for a certain area or certain type of property can cause problems for a CMA. If it’s a unique home in a particular area (a four bedroom home in a high-density, apartment-dominated suburb for example), or if that neighbourhood has very low home sales, it can impact on what comparable homes an agent selects.
In these situations, the skill and knowledge of a local agent really come into play.
“Many agents are very good at recognising this problem and explaining it to the property owner. The solution is to extrapolate data from similar homes in other neighbourhoods where key buyers of that particular property are likely to be looking,” Jeremy says.
However, in these instances, homeowners should always talk to the agent and ask questions to understand the basis of the extrapolated data and the quality of the comparison and, ultimately, the final property appraisal.
Help, I have two appraisals with very different price estimates! What is my house worth?
It’s quite normal for buyers to approach multiple agencies for an appraisal and CMA. In fact, at Lodge we recommend it.
“Most CMAs that we come across are prepared with enough skill and care that they reflect where the property is going to sit in the market quite well,” Jeremy says.
However, occasionally a CMA may not compare well at all. In these times, the property owner should question why they’re different and take a hard look at the data that makes up the CMA.
Consider:
- What comparable homes have they used?
- How relevant are they to your property?
- Do the sale prices of the comparable homes match the estimated price range?
The key thing to remember is that a CMA is only one part of the market research homeowners should do to make informed decisions about their property.
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