There are two ways in which home values can be estimated by real estate professionals. A comparable market analysis can be prepared, or an appraisal can be performed. The average consumer may not know the difference between the two, however, home buyers and sellers need to know.
Comparable Market Analysis
Real estate agents and brokers can prepare a professional, written comparable market analysis (CMA) for you if you are selling your home. A CMA will help you decide approximately what price to list your home for and approximately what price range it will sell for. Many real estate agents will prepare a CMA for you for free. The agent will need to know your address, the square feet of your home, how many bedrooms your home has, how many bathrooms it has, other rooms in your home, features, upgrades and updates your home has, and the name of your home's model if you have one. They will then pull comparable homes that are listed, sold, pending and expired in the multiple listing service (MLS) and prepare an analysis for you. These are often referred to as "comps." All in all, a CMA is performed by a real estate agent for a home seller or a home buyer.
Appraisals determine home values and are performed by licensed real estate appraisers hired by buyers' banks or mortgage companies. According to an article on Zillow.com written by Chris Beringer, What's the Difference Between a CMA and a Home Appraisal?, "The bank just wants to make sure it isn't lending too much money for the home." There are three different types of appraisals: the sales comparison approach, the cost approach, and the income capitalization approach. The sales comparison approach is the most common. This approach uses comparable sold properties that have closed within the last six months. It also uses properties in the closest proximity to the subject property. According to the Zillow article, it takes into consideration the location, the home size, the lot size, the age and condition of the home, the amenities in the home, the date of sale and the proximity to the home in question. The National Association of Realtors has an informative guide to understanding a real estate appraisal.
Why Knowing the Difference Matters
Knowing the difference between a CMA and a real estate appraisal is important. First of all, they are done at different times. A CMA is done before a house is listed for sale. A CMA can also be done by a buyer's agent, before a buyer makes an offer on a home, to help a buyer know what to offer on a home that is listed for sale. An appraisal is ordered by the buyer's bank or mortgage company after a buyer has a contract on a home. If an appraisal comes in less than the price on the real estate contract, the buyer may have some recourse and can try to negotiate with the seller to only pay the appraised price. The bank or mortgage company will typically not lend more money to a buyer just because an appraisal comes in lower than the contract price. If the seller won't negotiate, the buyer may end up paying the difference. If the appraisal comes in higher than the contract price, the buyer should feel even better about the investment.
A comparable market analysis and an appraisal are both good estimates of a home's value. However, they have different places in the real estate transaction.