Comparing Comparables: Advanced Comp Techniques delves deep into some of the more advanced methods of figuring out what a space is worth. Specifically methods of running comps or a CMA” geared toward volatile/dynamic post-covid markets.
In the world of real estate one of the most mysterious and confusing functions performed is the comparable analysis or CMA. Most people have an idea of what the function is but the understanding of how it is performed is mercurial for many home buyers and sellers. In a quickly changing market like the 2020-2121 real estate market comparables can be especially important and unusually… well, unusual. In this read, we are going to cover Comparing Comperables and 2 advanced techniques used in sparse or dynamic markets.
The general idea behind a CMA report or “running comparables” is that in order to assess the value of a property, one compares it to similar properties that are sold, in contract, and on the market (in order of priority). The general criteria for home value are price, size, and location: in CMA’s the location is replaced with time as the variable. The value is assumed to be based on properties that have sold within a half of a mile radius of the subject property so the time-proximity (usually 6mo into the past but sometimes up to a year) is the variable. Specifically, the amount of time since the unit has sold, gone into contract, or been placed on market.
The reason for this is that CMA’s are essentially a fancy sounding name for an appraisal. The function is designed to mirror the appraisal process as it needs to work in conjunction with an appraisal in order for homes to sell with financing. For instance: If you were to offer $800k on a $700k property, you may get an accepted offer with the seller; but the bank may only lend you 80% of $700k ($560,000). That puts the buyer in the difficult position of paying the difference ($240,000) or risk losing the deal. If the buyer doesn’t have the proper contingencies in the contract of sale, that buyer may also risk losing the contract deposit (typically 10% of the purchase price or $80k in this example) as well as the home.
Aside from the complex and often subjective methods of comparison, there are some advanced techniques used to help get clarity in sparse or dynamic/erratic micro-markets. One of the most unique factors of the COVID-19 pandemic is that it immediately dried up most transactions in real estate and subsequently eliminated many “sold” listings from the typical 6 month appraisal vista.
How do you compare property values when time has lapsed without sales and what has sold recently is trading at dramatically low/high prices? 2 Key Tools Will Help
First, find your footing. Use current comparable properties held up to older sold listings to determine the difference in similar properties trading now vs properties sold in the last 2years in order to determine the price difference. If you can narrow down the difference in sales prices you can create a baseline that tells you what the difference in similar properties should be, approximately.
How much does a balcony cost?
How much does a backyard cost?
How much does 1 story of elevation cost?
When you have a limited number of comparable units and they aren’t exactly the same it is very useful to isolate variables. The average difference in cost between a second floor and 3rd floor unit (all things considered equal) is about 1% of the purchase price in NYC. The average difference between coops and condos is about 15%-30% (all things considered equal and depending on the micro-market, common charges, and transfer taxes). Parking or a garage is generally worth about $50k in NYC. Find similar properties from as recently as possible, to compare amongst themselves. This is a way to isolate variables and determine the value of that 100sqft balcony that is obviously making a difference in price between your subject property and you current comps. There are data sets that you can search on the web, but most data sets are national and will serve only as a control set compared to your local market or specific neighborhood. New York has numerous and markedly different micro-markets, but when fine tuning in this manner, every neighborhood should be evaluated at a micro level as the steaks are high.
The thing that throws many buyers is the difference between a similarly sized, and located property in an amenities rich building ($$$) compared to one in an early century townhouse. How can you compare this $800k property to that $1.1mm property. The uncomfortable response is, “Well, they are basically the same, except for the finishes.”
The 14th floor, new condo, has 4 walls big windows no private-outdoor-space, washer dryer, and a gym. The townhouse has 4 walls, big windows, private-outdoor-space, washer dryer and a finished basement.
Once you isolate the value difference in outdoor-space there is still a big difference in price, why? Well the marble fireplace ($30k) is arguably more valuable than new kitchen ($12k). The new/updated bathroom is only valuable if it’s your style and you don’t want to renovate it. The big windows only add value if they don’t draft or if the walls are properly insulated. The materials are often more important than the finishes/appearance of the space. That value is highly subjective. Additionally, the difference in 50-300sqft is negligible if for instance that difference exists in a mud room or an eat-in-kitchen. Nothing wrong with either but for a buyer looking to have or make an open floorplan; tearing out a perfectly good kitchen is a waste of time and money. For a buyer in need of a view, a balcony may be more useful than bike storage or a walk in closet. Some spaces like an eat-in-kitchen, only function as a benefit if you spend a lot of time in the kitchen or entertain there. Because, if the kitchen is enclosed, it only functions as a kitchen. The extra space is isolated when it could be better served as closet space or living room space… or a mud-room.
This concept is particularly tricky but it is helpful to look at it from an appraiser’s point of view. Take extra square footage for example. Many appraisers would rather compare properties with a 300+sqft difference ( there is your mud-room or eat-in-kitchen) 4 blocks apart, than compare a 3 bedroom condo to a 2 bedroom condo in the same building. The value assigned to a bedroom is so vastly different than that assigned to a larger kitchen, that most appraisers won’t risk assigning the wrong value as it could have major tax-assessment implications. If a tax assessor valued the dining room as a potential convertible-bedroom (as in a junior 4 layout style) they could asses the property as more valuable (due to potential rental income from the additional bedroom, ***which is how NYC views it’s property taxes – based on potential income) and raise the property taxes of the unit. That could make the monthlies unaffordable for the resident and cause a default that could cost the bank too.
Learning what features micro-markets place value on, and why specific demographics are buying into that neighborhood is key in delineating values between similar but visibly different spaces. Value isn’t exclusively in how “cute” a space is. It is more so in how/what the appraiser finds useful or valuable.
Thank you for reading Comparing Comparables: Advanced Comp Techniques. Using advanced techniques in comparing comparables may be as simple as performing a lot of research or utilizing hard earned experience. Either way, it is helpful to have a deeper understanding of how these techniques can serve you in a unique market so that you don’t miss out on a good deal. Contact the Cunard Team today to learn more as you begin your home search or explore how to value your home before a sale.