Valuation, pricing and comparative market analysis
This domain tests how a registrant arrives at a defensible price opinion. Questions target the three approaches to value, the adjustment grid, market indicators such as absorption and list-to-sale ratio, the difference between a CMA and an appraisal, and the consequences of mispricing.
The three approaches
Cost (replacement cost less depreciation), income (capitalization of net income for revenue property), and direct comparison, the workhorse for resale homes. A comparative market analysis is a brokerage's opinion of likely sale price; an appraisal is a formal valuation by an accredited appraiser, often for lending purposes.
The comparison grid
Select three to six closed sales, similar in location, style, size, age and date. Adjust the comparable toward the subject: if the comparable is superior - say it has a finished basement the subject lacks - subtract; if inferior, add. Reconcile by weighting the most similar sales most heavily. State the effective date, and note that a CMA is an opinion, not a guarantee of value.
Market measures
Days on market, list-to-sale ratio, months of inventory (absorption rate) and the MLS Home Price Index or benchmark show direction better than average price, which a few high-end sales can distort. The median is more robust than the mean.
Worked example
Subject: three-bedroom backsplit with no garage. Comparable one sold at $730,000 with a double garage, and a paired sale indicates garages add $30,000, so adjust down to $700,000. Comparable two sold at $690,000 eight months ago when the index was 3% higher, so adjust up to about $711,000. The range is $700,000 to $711,000, supporting a list price near $705,000 with a strategy to capture early showings.
Pricing behaviour
Overpricing suppresses showings in the first two weeks when buyer interest peaks, and later reductions simply chase the market down. Underpricing can generate competition but risks leaving money on the table when demand is thin.
Traps
- Adjusting the subject to the comparable instead of the reverse.
- Mixing power-of-sale, family-transfer or new-construction sales without disclosing the difference.
- Presenting a CMA as an appraisal or a guaranteed price.