A comparative market analysis (CMA) calculates the approximate market value of a home by comparing it to similar homes that have recently sold or are currently listed for sale.
Usually, a CMA helps real estate agents determine a home's listing price and informs buyers on what price they should pay for a home they’d like to purchase.
Many times, comps don’t exist for one-of-a-kind luxury homes. As a result, a real estate agent can’t conduct a CMA to value the home. However, this doesn't mean the home is not worth the listing price or even more.
“If you’re looking for real estate comparables aka ‘comps' to value or justify the purchase price of an offer for a one-of-a-kind luxury home, you must consider alternative ways of valuation,” says luxury real estate industry expert Michael DeRosa.
Alternative Ways to Home Valuation
There are three ways to value a property:
- The Comparison Approach to Value – (No Comps in this instance)
- The Income Approach to Value – (Not Applicable in this instance)
- The Cost Approach to Value – (Applicable in this instance)
The cost approach is appropriate to value one-of-a-kind luxury homes.
It assumes that it doesn’t make sense to pay more for a home than it will cost to replicate. This approach considers the value of the land plus the total cost of construction, less physical, functional, and economic depreciation.
One of the limitations of the cost approach is that it assumes that the buyer is in a position to find a vacant piece of land in the exact location and build an identical home. But, unfortunately, that is not always the case and sometimes isn’t plausible.
When considering the cost to replicate or replace the home, buyers must consider how much the area has developed and how its current zoning law and building code have changed since the original construction.
As time passes and the area around the home develops, governing authorities can restrict new construction, especially for lakefront property. In addition, the current home and exterior structures are most likely grandfathered, granting the homeowners various privileges and exceptions to zoning laws. In these cases, the construction of the same home wouldn’t be approved if the same plans were submitted today for the same lot.
“When a home is priced above what you’re seeing in the market, it is usually due to the limited supply of housing inventory, or because it’s one of a kind. Many factors go into determining a home’s listing price which includes: location, the position of the home for the best view, and daylight or sunset. In addition, the condition, interior layout, functionality, size, style, high-value amenities, and grandfathered privileges also contribute to a home’s value,” says Michael DeRosa.
“The home’s value may be multifaceted and involve notable history, skilled labor, quality construction, rare materials, architecture, and art,” says DeRosa.
Outside of the cost approach to replicate, buyers tend to look at the home’s assessed value or the time it’s been on the market as a guide to base an offer. However, in most cases, these are not the right approaches.
Many assessors have never stepped foot inside the home or on the property. In addition, a home’s assessed value is not the same as its market value.
The Challenge of Unique Homes
One-of-a-kind luxury homes are categorized as “high-end homes” and typically take 24 to 36 months to match a buyer, depending on what market area they are located in.
“When valuing homes that are one-of-a-kind and luxurious, they must be looked at in great detail with high regard to who designed and built them. The home’s irreplaceable setting or view must also be considered,” says DeRosa. “A one-of-a-kind luxury home or property is generally available only once in someone’s lifetime. Often, the price a purchaser pays for a one-of-a-kind luxury home or property is simply the price one must pay to own something no one else has.”
A comparative market analysis (CMA) is a helpful tool for real estate agents to determine the approximate market value of a home by comparing it to similar properties in the area. However, finding accurate comps for unique luxury homes may be impossible.
In such cases, alternative methods, such as the cost approach, can be used to value the property. It's important to remember that the absence of comps does not necessarily mean that the home is not worth the listing price or even more. Real estate agents and industry experts must consider various valuation methods to determine the appropriate price for a one-of-a-kind luxury home.
This article was produced and syndicated by Wealth of Geeks.