Correctly identifying the appropriate price to purchase a property is vital in ensuring a successful venture into the real estate business. That is why estimating the fair market value for real estate assets is a science rather than an art. Real estate professionals and investors rely on some tools that offer them credible inputs about a property's value.
Real Estate Comparative Market Analysis (CMA)
In making a Comparative Market Analysis (CMA), real estate professionals and investors must research and gather information regarding purchase prices of similar assets near the subject property's location that were recently sold within the past 3-6 months.
When sifting for comparable sales or "comp," it is essential to consider structural similarities. However, finding identical properties to the subject property can be next to impossible. Real estate investors and professionals must evaluate close features of the comparable asset's land area, built up area, location, number of bedrooms and bathrooms, date of sale, and other relevant property features. Remember that the outcome of this evaluation determines the valuation of the subject property.
Appraisal in Real Estate
An appraisal is a procedure that relies on something other than the real estate investor or professional agent’s input. It has nothing to do with the priorities concerning selling the subject property. Moreover, it is typically driven by the requirements in securing a mortgage from lenders. The written report detailing the valuation of the subject property is the key to partnering with financial institutions when qualifying for support to purchase a real estate asset.
Prospective buyers must secure an appraisal document when requesting loans from mortgage lenders. This process is essential because banks need to protect their capital by confirming that the subject property's value is in line with the market. To this end, mortgage lenders require the appraisal of the subject property to be done by an independent party before they decide on the amount to lend to the property investor.
Real estate appraisers are licensed professionals that perform the function of property valuation by assessing the interior and exterior quality of the subject property. These appraisers consider the age, functionality, quality and condition of a real estate asset in their assessment of the property worth. The outcome of this formal process becomes the key to whether the mortgage lender will approve the financing request for purchase or otherwise.
Comparing CMA and Appraisal
Comparative Market Analysis and Appraisal are tools real estate professionals and investors use to determine fair market value on properties. Both valuation tools estimate the market value of the subject property.
Agents or property portals may offer CMA as part of their service or value-add offerings. However, the difference is that the Appraisal document is a formal document with a proper description structure. CMA is simple and offers casual estimates of the market price. In contrast, the appraising procedure can only be completed by licensed appraisers where valuation input can influence the decision of mortgage lenders. While professional agents can informally perform CMA, the process is inclined towards the marketability of the subject property rather than qualifying for a financial request, as in the case of the Appraisal procedure.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.