Many REALTORS(R), and real estate industry professionals, will throw arouifnd industry jargon and just assume the consumer knows what we are talking about. I’m going to address three words that all have to do with determining a property’s value that can be confusing to a consumer.
First, a Comparative Market Analysis, also called a Competitive Market Analysis or a CMA, is an informational estimate of your home’s value. Usually CMAs are prepared by a REALTOR(R). (You know you’ve received countless newsletters that say that if you call ABC Real Estate Company today, you will get a FREE market analysis. Here’s a news flash, 99.9% of REALTORS(R) will provide you with a free CMA. It’s part of the service we provide in hopes of getting a listing). CMAs are one of the lowest forms of price evaluation. The suggested market value is determined by examining Active Listings, Under Contract Listings, Sold Listings (within the last 3-6 months), Withdrawn Listings, and Expired Listings in your area that are comparable to your property. Many REALTORS(R) also look at specific market conditions like Average Days on Market, Sales Price vs List Price, and Months Inventory. All of this information, taken together, will allow the REALTOR(R) to come up with a price range of the most likely sales price. Or, more accurately, the price that will most likely garnish a contract in the least amount of time. Because the market is constantly changing, homes that are on the market should be re-evaluated by the listing agent at least once a month. It is important to remember that a CMA is only an estimate of what the home could get on the open market under normal circumstances. It in no way sets value for the property.
There are a few terms that have existed in the real estate industry for quite some time, but it has been the recent market to bring them to the forefront of consumer minds. One such term is Broker Price Opinion, or BPO. A BPO is a tool used by lenders, mortgage companies, and relocation companies to obtain an estimated value of a property to determine viability or strength of a sale. They usually contact a REALTOR(R) and pay the REALTOR(R) a set fee for researching comparable properties to determine value. A BPO will have information regarding comparable Active Listings, Under Contract Listings, and recent Sold Listings. They will also contain information on sales trends in the area, employment opportunities, quality of life in the area, and an estimated cost of repairs for the property. The REALTOR(R) will provide two estimated values, one for selling the house with all repairs made and one for selling the home “as-is.” In this market, lenders are calling for a BPO to determine if a contract on a short sale property has a contract price that is in line with today’s market value. Remember, BPOs are a little more detailed than a CMA, but they do not determine true market value for a property. BPOs are an estimate of value.
More people are familiar with the term Appraisal. An appraisal is generally performed by a licensed or certified appraiser and is the value of real property as of a specific date. An appraisal is still just one person’s opinion based on 3 approaches to determine market value. These 3 approaches are the cost approach, the sales comparison approach, and the income approach. When determining value for a residential property, the sales comparison approach is usually given the most weight. Market value is the estimated amount a property should sell for on a specific date between a willing buyer and a willing seller in an arms-length transaction in an open market. The buyer’s lender will order the appraisal. The appraisal will be paid for by the buyer. The appraisal is used by the lender to determine if the subject property is a good investment for the lender at the contract price. A lender will not lend more money than what an appraisal determines the home is worth.
In a perfect world a CMA, a BPO, and an appraisal on the same property should garner similar values, within a few thousand dollars of each other. However, all three value estimation tools are subjective. Their subjectivity is the source of many real estate debates in recent months.
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