Copyright

Market Data Analysis in Property Appraisal: Definition & Factors

Instructor: Kyle Aken

Kyle is a journalist and marketer that has taught writing to a number of different children and adults after graduating from college with a degree in Journalism. He has a passion for not just the written word, but for finding the universal truths of the world.

Comparative Market Analysis (CMA) is a method for pricing a real estate property that is for sale. Factors that are important in CMA include market area delineation, demand analysis, supply analysis, absorption analysis, vacancy analysis, and market rental analysis.

Market Analysis

Comparative Market Analysis (CMA) is a method used to help buyers, sellers, and real estate agents or brokers to fairly price a property. Simply put, it is an analysis of the cost of similar properties within the same area of a community, as well as other characteristics such as features of the property and vacancy rates in the area. Adjustments are made according to a property's individual differences from similar properties nearby. Most often a real estate agent will assist a seller by examining other properties in order to help a seller set an appropriate list price or help a buyer formulate a suitable offer.

Supply and Demand Analysis

A supply and demand analysis requires several modifications to standard microeconomic procedures. One of the most important factors is the unique characteristics of a specific real estate market. The following unique characteristics are of particular importance:

1. Durability - Real estate property is generally considered very durable. Homes and other buildings can last for centuries and the land which they are on can be considered 'indestructible.' For this reason, real estate markets are often gauged by a 'stock/flow market' standard. Real estate supply stock is determined by the stock of the previous period, deterioration rate of currently existing stock, renovation rates of currently existing stock, and amount of new development. About ninety-eight percent of supply is already existing real estate, while only two percent is from new development.

2. Heterogeneity - It can be difficult to price real estate in terms of its exact location, financing, and the building itself. For this reason, supply is defined in terms of service units. This means that any physical unit of a real estate property is able to be deconstructed according to the services it provides or may provide.

3. High Transaction Costs - Transaction costs can include real estate fees, moving expenses, legal fees, deed registration, and land transfer taxes. Even the seller typically ends up paying between one and six percent of the purchase price on real estate transactions.

4. Time Delays - Market adjustment can be affected by time delays in the buying process. For this reason, an imbalance can be found even in a short length of time.

5. Investment Goods and/or Consumption Goods - An investment good is expected to gain a return. Consumption goods are expected to be utilized in some way. Many buyers combine these functions, causing over-investment in real estate property.

6. Immobility - This refers to the fact that the goods in real estate are unable to be moved, leaving buyers to have to sell the property, whether it be commercial or residential (minus the consideration of mobile homes).

7. Demand for Housing - The demands of residential markets are generally determined by demographic information but can also be affected by property price, income, financing, consumer and/or investor preferences, and prices of substitutes and complements.

8. Supply of Housing - Supply is determined by use of land, labor, and several inputs like building materials and utilities. The quantity of new supply is determined by input costs, existing house stock prices, and production technology. Estimated cost percentages can be estimated by the costs of acquisition, site improvement, labor, materials, financing, administrative procedures, and marketing.

Other Definitions and Factors

Market Area Delineation - This process defines the geographic extent of demand for a given property. This is often used with commercial real estate. For example, the market delineation for a space in a strip mall may state that this location will likely get customers from a three county area. This is important for commercial real estate buyers in that it will affect the number of potential customers and that will have an effect on the profitability of their business.

Absorption Analysis - This method of analysis allows buyers, sellers, and real estate agents or brokers to ensure that their specific buying and selling strategies are aligned with the landscape of their particular market. Absorption rate is the average number of months it should take to sell homes that are currently listed in the local market. Past sales and current inventory are not sufficient factors in determining the landscape of local real estate. This method allows sellers to align their list price with the necessary time frame to sell their property. It allows buyers to make an appropriate and fair offer on a property if the list price is too high. Real estate agents and brokers are able to utilize this analysis to have a competitive edge with clients as they gain an upper hand when negotiating contracts and offers. The knowledge of absorption rate is also one of the most effective ways to demonstrate knowledge of the market, which will help to better serve current clients and interest new ones.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support