CMA vs Appraisal

    When your buying or selling a home you are likely to hear two different terms that both have to do with the monetary value or price of your home.  The CMA provided by your Realtor and the Appraisal provided by your Appraiser.

    The first is the Comparative Market Analysis or CMA which will be provided by a Real Estate professional.  This first “price opinion” tool will help you identify the “market value” for your home by looking at the current market conditions and the condition of your home.  The idea is to narrow the scope of sales data down to a single sales cycle which in this specific market on this specific month is about 90 days.  The Realtor is trying to identify the price at which the home will sell when exposed to enough buyers in a fair market all of whom are given equal access to credit and capital.

    Items that are considered include other homes that are currently on the market which a home buyer may choose instead of the home you are currently evaluating, homes similar to this home that have sold recently, homes with similar features that have also sold recently, trends in the market to show if it is going up or down over the next couple months, and any other specific information relevant to the sale of this specific home.  If while doing a CMA the Realtor identifies that the home is a unique property that only two people in the state would want to pay more than a million dollars for and if it is known that neither of these two is interested in moving then the Realtor can safely price the home under a million dollars.  There is simply no buyer willing to pay a higher price and because of this, the market value for the home cannot be that high.

    The difference occurs when it is time for an “appraised value” of the home.

    The models for an appraised value does not take into account potential consumers for the home or market viability for the property.  Instead, it looks at the literal value of the property as it would stand on its own merit.  In this situation, the question would become if exposed to a market of buyers capable and interested in purchasing the property, at what price would the home sell.  The appraiser can also look at the home as for how much would it cost to replace the home should the home be destroyed and the current owner wishes to replace it with another just like it.

    This difference matters to you when you receive either one of these two reports.  If you are trying to market or buy your next home you will need to know the market conditions and because of this, you will need to know the market value of your home.  This value will tell you how much you can expect the home to sell for in the current market given the current market conditions.

    The other number, the appraisal value, is important when you are looking to finance the home you are purchasing (or if the buyer of your home is financing).  This is because the bank will only loan so much of a percent of the appraised value.  For an FHA Loan the max the bank will loan is 96.5% of the appraised value which means if you offered $200,000 on a home but it appraised for $180,000 then the bank will only loan you $173,700 so you would be responsible for paying $26,300 in cash at closing towards the down payment on the house.  If the house had appraised for the full $200,000 you would only have to pay $7,000 at closing in this down payment.  Keep in mind this is only one of the things you will be asked to pay at closing, there are several costs that go into “closing costs” and your lender can help you better identify what they will be for your specific situation.  At the same time if this same house appraised for $220,000 the bank would still require you to put down the full $7,000 as they would cap out at the selling price of the home.

    If your neighbor is selling an identical house, which sometimes happens in subdivisions, you need to pay special attention to their price.  If you market your home above their price and don’t have a way to distinguish yourself from theirs in your advertising (that is before the buyer even gets to your door) then your home price will give value to their home price and they will sell before yours every time.

    Play this scenario in reverse and you have found a good way to sell faster in some subdivisions, but be careful this only is looking at market value.  I have used this marketing technique before and it has caused the home I was marketing to sell for substantially more than its appraised value.  When the buyer learned the appraised value was lower they requested a price change and when my seller did not provide one the buyer canceled the contract to find another home.

    Know which approach you need and what information is most helpful to you.  Then decide if you should hire an appraiser or a real estate professional to conduct your valuation of the home.  But, remember that in the end, a piece of property is worth what the current homeowner was willing to pay when they purchased the home.  Any other price given to the property is speculation and unrealized gains or losses.

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