In the previous segment, we talked about you becoming the best agent for the job. I mentioned the importance of learning your market statistics and told you exactly how to do that. I discussed how you could increase your credibility and power by arming yourself with some very specific knowledge. I’ll assume that you’ve done your homework now and are ready to learn the actual listing presentation that made me one of the top listing agents in the country.
I want you to notice that I haven’t referred to myself as one of the smartest agents in the country because there are plenty of agents who are smarter than me. I haven’t claimed that I’m the hardest-working agent in the country because there are lots of hard-working agents.
But I do maintain that I’m one of the top listing agents because there are very, very few agents who have listed as many homes in a single year as I have, and even fewer who have listed all of their homes for 8% or more. And there are fewer yet who have netted their clients as much as 10% more money at closing while selling their homes twice as fast as most of the agents in their markets.
So how do I do it? I use a unique system that I call “the traffic approach.” In a few minutes we’ll get into this approach to listing, but first we need to examine how I go about doing a CMA (comparative market analysis).
The Ultimate CMA
Let’s be completely honest… as a listing agent using the traditional method of doing a CMA, you can make the numbers say just about anything you want. I know that’s a pretty strong statement, so let me explain.
With the traditional CMA method, the agent selects three recently sold properties that are closely comparable to the subject home (or the home being valued). In most markets, it’s easy to find three properties that sold high, three that sold low, and three that sold somewhere in the middle and still have many other comparables from which to choose.
The real problem is the sample size. In statistics there is a concept known as “margin of error”. The margin of error in any sample can be calculated with a simple formula: Margin of error equals one divided by the square root of the sample size. For example if you have a sample size of 400, the square root of 400 is 20. One divided by 20 is 1/20th or 5%. The margin of error for a sample size of 400 is 5%.
When I teach classes on doing a CMA, I typically walk the class through these calculations on several sample sizes. What if you had 100 in your sample? The margin of error would be 10%. Or a sample of 64? A 12.5% margin of error. What if you had 25? Margin of error is 20%. A sample of 16? You’ve got it… 25%.
Then I ask them what if they had a sample of just 3 comparables? Margin of error of 58%! Think about it. You are essentially saying, “Mr. Seller… your home is worth $220,000… plus or minus $129,000!” Thankfully, you aren’t really saying it, or you would never get the listing.
Do you see the problem? It’s the sample size. That’s why when the seller balks after you suggest a listing price, you immediately retreat and say, “Well, maybe I can try to find some different comparables and call you back tomorrow.” Then you go back to the office, tail between your legs, and rework the comps and voila, you manage to build a new CMA with the price the seller wants. Let’s be honest. We’ve all seen this happen, if we haven’t done it ourselves.
What we’ve traditionally been trained to do is use the least expensive set of comps for their initial CMA. This method makes the case for listing the home as inexpensively as possible and allows it to sell quickly. But there is one problem with that. As a seller’s agent, your fiduciary responsibility is to your seller. That means that you should be trying to get your client the most money for his property, not the least.
“So great, Matt,” you’re thinking, “You just destroyed the way I’ve always done CMAs. How do you do a CMA?” Good question. When I prepare a CMA, I take data from three sources: tax records (original sale price, not the assessment data), closed comparable listings in the MLS, and active comparable listings in the MLS. Remember, to get the most accurate price possible, with the lowest margin of error, I need the largest possible sample size.
First I look at the tax records to determine what I feel to be the “adjusted” current value of the home. For example, if it sold three years ago for $150,000, and there’s been an appreciation rate in that area of 25%, then I add that figure to the purchase price.
How do I find out how much the market has appreciated? Easy enough. I take the average sale price for the market (or any large subset of the market if there is enough data to give me a good sized sample) for the year the seller bought his home. Then I find the average sale price for the current year using the same sample group.
If the average sale price for my sample group for year one was $200,000 and the average sale price for this year is $250,000, then the market has appreciated 25% over that period. I then adjust the original purchase price by that amount. Using the example above, $150,000 plus 25% or $37,500 is an appreciation-adjusted valuation of $187,500. Certainly, this particular method, alone, is rather subjective. But, this is only one part of my valuation process.
Next I pull up all the closed comparables in the area or subdivision, going back a reasonable period of time, and I can usually find between ten and twenty of these. (In extremely hot markets where homes appreciate at double-digit rates, you shouldn’t go back farther than a few months or so in order to prevent the CMA from being skewed downward.) In most markets, that is not a problem.
Don’t forget that the amenities and how nice a home looks will affect the curb appeal and saleability of the property but will have very little impact on appraised value, so it’s best to use as many comparables as possible. In selecting my comps, I use the subdivision, the square footage (with a range of plus or minus 10%), and the number of bedrooms and baths. I then calculate the average sale price of the group, eliminating any outliers (e.g. homes that were foreclosures or distress sales) from my calculation.
Finally, I pull up all the active comparable listings. Again, I use the subdivision, the square footage, and the number of bedrooms and baths, but your market may be a little different in how the appraisers select comps. The point is to get as much data as possible!
Now we put it all together. Take the appreciation-adjusted value from the tax records, add the average price from the closed comps, and then add the average price from the active comps. Now take that number and divide by three, and you’ll have the true average value for the subject property.
Write down this new number somewhere, add and subtract 5% from it, and you have a “reasonable range” for the value of the home. And it’s accurate. If you use this method, you will find that you simply cannot skew the valuation up or down like you can using the Traditional CMA.
I know this is an out-of-the-box way of doing a CMA, but it will absolutely stand up under any amount of scrutiny by clients, other agents, or — most importantly — appraisers. I can tell you from experience that when you show your valuation to an appraiser or buyer’s agent, they have no issues with it. And this method will protect you from accidentally over-pricing or under-pricing a property.
Most significantly, it will reinforce in the mind of your seller the fact that you’re a market authority and know what you’re talking about. If a seller client should be harboring a suspicion that you’re trying to skew the numbers, his or her fears will quickly be allayed because you’ve considered every possible comparable in arriving at the current value of the home. Nothing except an actual appraisal could be more fair.
But now comes the fun part. Instead of having to do all that math, which is fairly time consuming, you can now use our simple calculator to build the Ultimate CMA and Proceeds Estimate in only a couple of minutes. In less than 5 minutes you can create a scientifically accurate CMA and Proceeds Estimate that will impress any seller.
Until then, work on getting your lead capture technology in place so you have an unending supply of inbound leads. And try out a few CMAs so that you are comfortable with this method. Next we’ll go into the actual presentation.
Matt Jones is the founder and CEO of FavoriteAgent.com and nationally syndicated author of LCM: The Secret to Success in the New Age of Real Estate, The Ultimate Listing Presentation, Traffic: How to Sell Fast and Net More, Becoming a Mega-Producer, and 20 Questions: Everything You Always Wanted to Know about Real Estate but Were Afraid to Ask. Jones’ North Carolina-based company has been profiled by major media outlets as an innovator and a pioneer in the industry, and CNN’s Pulse on America claimed FavoriteAgent.com is “changing the way real estate is being done in America.” This content is cross-posted in the following locations: BlogMattBlog.com, RealBlogging.com, NewsGeni.us, TheCommissionCheck.com, and now Amazon Kindle.