Comparative Market Analysis

A Comparative Market Analysis (CMA) is a valuation of a property, done by a real estate agent, or anyone else, who is not a qualified and registered valuer. Only a registered valuer can give a valuation in the true sence of the word. A real estate agent can merely give an informed opinion of the market value of a house. To distinguish the two, this value-opinion is commonly known as a Comparative Market Analysis (CMA).

Different Property Valuations

South African real estate owners are familiar with the term "property valuation", and its probably not a new concept to you either. But there are enough differences between various valuations that it warrants to elaborate a bit in this article.

The method of determining property value depends on the purpose of the valuation. Many different people and institutions are interested in what the value of a property might be.

Banks, or lenders, require a valuation to ensure that their loan will be secured against a property of equal or lesser value. They are interested in the market value of the subject property.

A valuation for insurance purposes is usually based on the replacement value of a property. In other words, what it would cost to rebuild the property at today's building costs. There are specific formulas and things that are used to calculate the replacement value.

A prospective homebuyer of property seller who requests a real estate agent to prepare a Comparative Market Analysis to determine a property's value, is also interested in the market value of the property.

Only a few years ago, many South Africans were scrambling to get a property valuation done, before the cut-off time for Capital Gains Tax valuations. These valuations were done to determine the market value of properties as on 1 October 2001, when Capital Gains Tax came into effect.

Unlike valuations done for the purpose of obtaining a mortgage bond approval from the bank, or for insurance puropses for insurance companies who specifies that valuations be done by registered valuers, thevaluations for Capital Gains Tax purposes could have been done by anyone. The most important thing was to make sure that the person who determines the value as on 1 October 2001, provides adequate support for the value findings to be able to convince SARS, when the time comes.

If SARS is not convinced, the owners may be taxed as if a valuation was never even done!

Determining Market Values

Many people, including some real estate agents, get a little confused about what a property valuation or Comparative Market Analysis is. To the untrained eye, it simply looks like someone visiting a house or other property, looking around a bit, and then doing a jolly old thumb-suck before deciding on a value! The valuation process is actually quite an involved process.

A good valuer will visit the subject property to be valued, and take extensive notes about the characteristics, quality and make-up of the property, and even take pictures. But this is only one step in the valuation process! Valuing a property also inclue a considerable amount of research.

For residential properties, the most reliable method of determining a market value involves comparing the property with other similar properties in the area, which have recently sold. Yes, only houses that have already been SOLD can be used to determine a reliable market value for the subject property!

It might be interesting for prospective homebuyers and property sellers to look at properties that are in the market today. But these properties only give an indication of the competition in the property market, not of market value! In other words, a seller will be able to see what the subject property will be competing with when it gets put up for sale.

So, a valuer has to somehow know what properties in the area has changed hands in a bona fide sale agreement. This information was always only available from the local Deeds Registries Office. But today, with the advent of information technology and the internet, various sources can provide lists of recent sales in an area.

The next step in the valuation process is to identify the comparable properties from the list of recently sold properties. This means either an initial phone interview with the current owners or occupants, or a knock on the door. But a physical inspection and information about subsequent changes to the property is a must.

If the subject property is a neat four-bedroom, two-bathroom house with a double garage, the valuer needs to find recently sold homes in the area that can be compared to the subject property. So, it would be ideal if a number of other neat four-bedroom, two-bathroom houses with a double garages can be found. But a three-bedroom house can also be used for comparison. The differences between the comparable properties have to be noted and taken into account, though. No two properties are alike! That is what makes real estate so interesting, unique and worthwile.

Properties and property values can differ considerably because of location. So valuers have to make sure that they compare "apples with apples". A property facing onto a beautiful beach can therefore not easily be compared with a property a few hundred meatres away, but with no view of the ocean. The same goes for a property is a tree-filled cul de sac and one just two streets away, facing onto a busy traffic-way.

The differences have to be clearly noted and taken into account for the value determination.

The next step in the valuation process is to take the current real estate market conditions into account. The lists of recently sold properties in an area is compiled from the property transfers that take place in the area. The transfer process can take quite a long time (three months on average), so price movements may have to be predicted for the elapsed period. This can only be done at the hand of accurate real estate sales statistics. Absa Bank's regular report on trends in the property markets in various areas in South Africa is one of the tools that can be used in this stage of the valuation process.

Property Value Report

The property value report is the document most people refer to as the valuation or Comparative Market Analysis (CMA). This is the document in which all the research, notes, assumptions and conclusions of the property valuation is presented.

The property value is never expressed as a simple figure. Because the valuation is only an informed guess regarding the value of the subject property in the specified market conditions, it is more accurate to express the value conclusion in the form of a relatively narrow price range.

It is not possible for someone to determine the value of a specific property at an exact R100 000. But a good valuation will usually also not indicate the property value to be within the range of R10 and R200 000!

Not Proper Valuations

The popular practice, especially among real estate agents who are members of the various multi-listing services in South Africa, whereby a number of real estate agents each scribble their opinion of what a property might sell for on a card or piece of paper, is not a proper property valuation or a Comparative Market Annalysis. At best, this would be an expression of the real estate agent's price wish for the property's mandate.

Agents are not buyers, and many agents who attend the open hour at your house might not even be terribly familiar with property in your neigbourhood. An argument to support this practice, that the value opinion obtained through this process have often proved accurate in the past, cannot clearly be attributed to the agents' incredible natural insight into market values. There are many factors that could explain this accuracy phenomenon, including the "self-fulfilling prophesy" effect.