Many homeowners often become confused when trying to understand the difference between an appraisal and a comparative market analysis (CMA). To the layperson, the two are the same. In reality they are very different.
Let’s explain the purpose of each. Knowing the purpose of each helps differentiates the two.
Mortgage lenders use an appraisal for one main purpose. The lender wants an opinion on the fair market value of a specific house based on comparable houses that sold in the same area within the last 90-180 days in order to make a mortgage. Because there are no two houses exactly alike and no two pieces of real estate exactly alike, lenders must rely on the expert opinion of an appraiser to determine how much money to lend on a house. Appraisers provide a professional opinion of the value of real estate based on the features in the subject property versus the features in the comparable property.
Normally an appraisal includes a property superior, inferior and nearly comparable to the subject house. Sometimes an insurance company hires an appraiser to validate the policy coverage. The county tax assessor has an appraiser determine the fair market value for property tax purposes.
Another important feature of the appraisal is that the appraiser uses a tape measure to determine room sizes and includes a floor plan sketch. Different appraisers can compute different values for the same property. Lenders normally want the appraised value within 5 or 10 percent of the loan amount. That is because an appraisal is not an exact science. When the appraisal differs significantly from the expected answer, the entity requesting the appraisal can request a second or even a third appraisal.
Patrick Parker Realty offers a complimentary comparative market analysis (CMA) to a seller considering putting their house on the market.
Let’s discuss some of the differences between an appraisal and a CMA:
- An appraisal contains just three comparable properties and all have the same general characteristics. A CMA lists all comparable sold properties to gauge the level of market activity.
- A CMA also considers active comparable properties. This gives the seller an idea on the competition he faces and an expectation of market activity. For example, assume the Agent preparing the CMA identified six comparable houses to the subject closed in the last six months. That tells the seller about one house a month sells. This gives the seller valuable information not included in the appraisal, because the lender needs only three comparable properties.
- An Agent might expand the CMA for a seller to identify houses that expired without a purchase contract. This also helps the seller determine a list price. Appraisals do not contain active, expired or even houses under a purchase contract but not yet closed.
- A CMA informs a seller about the expected sale price of a house, based on supply and demand within that market.
- An Agent can factor a seller’s motivation into the CMA. For example, a seller might want a property sold quickly because that client wants the transaction closed by a specific date to achieve another goal. Another goal could be the seller is moving to another state within the next 45-60 days for new employment. He cannot afford two house payments.
So which is better an appraisal or a CMA? The answer depends on the need. Anyone wanting to find the loan value of a house needs an appraisal. Anyone thinking about selling a house needs a CMA. Only your Agent can prepare a CMA. Contact Patrick Parker Realty for a complimentary comparative market analysis.