If you have spoken to a REALTOR® about your property value recently, you have probably heard the terms ‘comp’ or ‘CMA’. The definitions of these terms can get lost in the shuffle, as usually clients want to ‘cut to the chase’ and get to the final numbers. For both buyers and sellers, agents sort through sales data to find properties that are similar in size, amenities, and location. These comparable properties are what are used to determine a fair market price for a home, usually via a comparative market analysis.

How does this work for sellers?

To determine your home’s fair market value, your agent will analyze data from recently sold properties and currently competing properties. Recently sold means ideally in the last 90 days, but beyond that 6 months is okay. A year is getting a bit long, but if that’s what it takes to find a comparable property, it is still acceptable. The properties need to be similar in size, generally plus or minus 200 square feet. They also need to be similar in location. Same subdivision is best, beyond that move to the broader neighborhood, beyond that, the larger community.

Your agent should have a good handle on which areas go together and which do not, i.e. a pocket of larger homes on gated street are not comparable to several smaller houses surrounding them. Lastly, the homes need to have similar amenities. Even if a house is the same size and location, but one is a custom home and the other a production builder home, they are not exactly comparable. The custom home will have one-of-a-kind features, and the production home will have the same floorplan and be finished alike several other homes on the street.

Once they have found a selection of properties that are comparable, they will divide the sold price by the square footage of the home to come up with a price per square foot. Based on this number and the square footage of your home, it is pretty easy to come up with a general price range. The variation within that range now is based solely on your property’s condition and appeal.

In economics class, we learn that the value of something is what someone is willing to pay for it. A clear example of this is the sold values. Anybody can price their home at any number they want. But, when you use sold comps to determine your price, you are using the best guide, namely what someone has been willing to pay. There are always slight exceptions to this as no two houses are exactly the same. If none of the sold comps have pools but yours does, of course yours is worth more. Not usually the cost of the pool more, but more. Similarly, if yours does not have a pool and all the comps do, it is worth less.

If the person who wants to buy your house will be doing so with a loan, i.e. they are not paying cash, their lender will hire an appraiser to determine a fair value for the property. If your home is priced much higher than the sold comparables, you could have trouble with the appraisal not coming in that high, in which case, the lender will not underwrite the loan and your deal will fall apart. Also, in this day and age, consumers are pretty savvy and have access to data via the internet, so they will have a general idea of what others have paid. So, when setting a price for your home, the best thing to do is work within the numbers of the sold comparables.

How does this affect buyers?

When you are looking for a home, based on your criteria, most of the homes will likely fall within the same price range. But, even if they are in the same price range, you will need to note what the price per square foot is. Your agent will run a CMA and determine how the homes are priced in relation to what has sold recently and what else is on the market.

Though the final decision is up to you, paying a price for a home that is much beyond sold data is risky for two reasons. First, the property may not appraise. This isn’t an issue if you’re paying cash, but will be if you need to obtain financing. Second, if for some reason you would need to sell in the next couple years, you could find yourself in a situation where you may be upside down, i.e. the cost of selling the home (commission and closing costs) is greater than the proceeds you would net from the sale, meaning you would have to bring money to the closing rather than leave with a nice check. For these reasons, it is a good idea to make sure and do your homework.

About The Author: Kimberley Kelly is a La Quinta Real Estate specialist with more than 11 years of experience helping home buyers and sellers with their Palm Springs real estate  transactions. For more information on Kimberley, please visit her Palm Desert Real Estate website.