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CMA Logic and Lack There Of!

I am not sure if you have ever taken a class in "Statistical Analysis", but I have taken several and always get a kick out people trying to defend their values or estimates with little true basis!

What I mean by that is that with bad statistical analysis I can prove almost anything if you let me select the sample. If I wanted my analysis to show the number of children per average home should I sample the one bedroom condos or the five bedroom homes to illustrate the answer I wanted?

I have yet to see a real estate class taught that covers statistical analysis (other than what can be done in Excel or Access type programs). They should require sampling strategies, bell curve analysis, standard deviations from the norm, percent confidence levels, etc. In a "Bell Curve" your average (one standard deviation from the norm) only covers 68% of the entire sample. If you go out two, you at least cover nearly 96% of the population. In the chart below which illustrates the Bell Curve for IQ distribution, you will see that if your IQ is over 145, (4 standard deviations from the norm) you are truly smarter than 99.8% of the people and will be extremely frustrated with a world based on "normal" being at 100!

Too many real estate valuation models are based on easier methods like Price Per Sq. Ft. Some extreme examples of other industries in which that doesn't make sense include:

Automobile - do you buy your car by the pound? Cost per pound of a Harley Davidson vs a Hummer H2 vs a Honda?
Restaurants - Does Caviar cost more or less per pound than regular eggs? If it is all just "beef" why does prime rib cost more than hamburger?
Art - why does a gold necklace cost more than the value of the gold alone?
Clothing - Does Victoria's Secret charge extra or less for their skimpy little outfits?

There is a huge attempt to treat real estate like a commodity. Companies like Zillow admits their numbers are off (varies by market) at first it doesn't sound bad if the number is give or take 10% but that is 10% on either end so their range is really 20%. For example, a $200,000 home could be $180K-$220K! If the true value was $220K and the price they sold for themselves without a Realtor is the low end (since they thought they saved money) is $180K, they left $40K on the table! That equates to selling at an 18% discount yet they "saved" about 6%. They could have hired five Realtors for that with non exclusive contracts since only one would end up receiving the offer (5x3%=15% +3% =18%). Obviously, that is a weird example, but I wanted to prove my point on "bad math"!

Just for fun, the next time you do a CMA, compare the following:

Average price per sq. ft.;
Average sales price;
Median Sales price;
Median Sales Price;
Mode Sales Price;

If the average home in your market sells for 97% of list price, do you list your home at the "average" or do you jump down to 97% to be where the buyers are ending up?

Figures don't lie, but liars figure, while others are just plain ignorant and speak the loudest!

Jim Paulson, CRS, GRI, EPRO, SFR

NAR Employer Assisted Housing Instructor and EPRO Instructor
Owner/Broker - Progressive Realty Corporation
Specializing in Boise Idaho Real Estate
http://www.IdahoMLStours.com
Http://www.Progressive-Realty.info

Posted by Jim Paulson (Owner/Broker) on 11/20/2009 10:28 AM

Comments (34)

CMA's vs AVM's - Statistical Analysis or Not? in the Sales Strategies / Tactics Channel

cma, average realtor, real esate statistics, computer valuation models, avm, market analysis

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34 Comments on CMA Logic and Lack There Of!

NOV

2009

Fascinating. I'm a sucker for any statistic.

I do see value in square feet comparables within a fixed set of parameters. It's certainly a better indicator of value than, say upgrades, which as I continually point out to sellers and listing agents are simply maintenance.

I love it when a 30 year old furnace is advertised as an upgrade. Same with that 25 year old roof.

Add some square feet and we'll give you more money.

Great and timely post Jim as I am struggling with a newspaper article today in our community that states Median Price is up. ?? Median price of what? Just real estate isn't a definition of the product. A price is just a number, when applied to a product it becomes a value. So whether it be price per bedroom, price per bath, price per square foot or price per lot size, median price tells us squat as to real estate values. The product needs to be defined for a value to be applied.

I do not believe any one property should be priced by using p/sf, or p/ba, but market trends can be studied with those numbers. And why median price, why not average? Median can skew quicker than average.

Here is something else I have a problem with in real estate stats. Using non-MLS sales. A data company that includes all recordings in its analysis is using sales that may not have been open to the entire market. MLS means the property was available to an open market of buyers and therefore is a more true statement of its Market Value. Using all closings includes off-market transactions which are not comparable to an open market value system. (after all, it is called Market Value, not off-Market Value). Also, recordings without realtor involvement usually suggests misrepresented sales prices.

When the media reports 'Median Sales' are up or down the average reader applies that trend to their personal situation. When in fact, most reports are erroneous samples of a flawed pricing structure that does nothing to establish what is really happening to a market's real estate values.

I love stats, and use them fairly often. I have always said tge same thing about Victoria secrets, you pay more for less. Funny how things work these days.

Jim: Great post! I have some major issues with Zillow. Their numbers are about the numbers, but their program lacks the knowledge of location, condition, amenities, etc. My property is actually 2 parcels, but Zillow doesn't know that. A portion of the general public takes as the gold standard. As if!

Great info. I wish that I could find a good statistics course geared toward real estate valuation. When I do a CMA, I try to find homes in the same neighborhood with similar upgrades. There are so many variables that go into the price per square foot for homes.

I like your point. Key factors that numbers miss is location and condition. Sometimes there is a subjective intreptation. Zillow does not account for the fact that a house backs-up to a busy highway, or it has a stigma. Doing a good CMA accounts for more than cost per square foot, Especially in areas where the market prices are sliding downward. Bloated listing prices help no one.

Jim, Not only do we have to know the stats but we have to know which ones are relevent for our particular markets. Price per sq footage works great in a townhouse/condo project where there are only a few models to choose from. Price per sq ft also works well in a cookie cutter neighborhood.

On some unique poroperties judgement may work better than any statistics.

Our job is to know these nuances and how and when to apply them.

Jim - I study numbers and understand trends, but price intuitively.

Jim,

Good article. I don't like Zillow because of the lack of the statistics being comparable.

A home is worth what a buyer is willing to pay and seller is willing to take. Go figure. And don't get started on survey's

I agree that CMA's can be tweaked to fit anyone's perspective. I try and give two or three CMA's to my clients so that they can see different ways of comparing the data. That way they can make the most informed decision.

One of my agents used to work for the second largest home builder in Idaho and in one community they averaged about $25K in upgrades per pre-sold. Therefore, if I bought the base model and you upgraded the $25K some agents assume based on price per square foot our homes are equal. In the spirit of Christmas - Bah Humbug!

As soon as I get the world trained on how to just measure sq. ft., I will start indoctrinating them into the mindset of "cubic feet". Is the home worth the same with 8 foot ceilings vs. 9' vs 10'? What about the open cathedral ceiling in the living room that could have been built out to make it another 300 sq. ft.?

In condos, it makes a difference if it is a main floor or an upstairs unit doesn't it? Main levels sometimes sell for more money unless you go up high enough to get a better view and/or less street noise. I know I was able to prove in one downtown condo unit that each level up was worth roughly another 5% more in value.

Keep fighting the good fight to help prove all homes are not created equal or we will be replaced with an online valuation model! Homes are not commodities and neither are Realtors. Each has to be sold on the additional value they bring to the consumer!

Bad writing is just as much of a problem as bad stats, and they usually accompany each other.

Thanks for your post.

Many people try to base the price just on square footage, but there are so many variables involved besides that!

You can make numbers tell any story you want. The government does it all the time.

Comparable selection is an art, not a science. If it were a science, Appraisers would have been out of business years ago and replaced by computer programs.

Nice picture. It got me way off track in my thinking.

Jim - Very interesting. Statistics are always fun to analyze and read. Last year, my board had a headline stating "Fifth best June ever!!". What that meant is that it was the worst June in the past five years since in older years, the population and number of houses available in the market was substantially lower.

Interesting information, I also love statistics. I think doing CMA's is part science and intuition.

Stats, commonly known as statistics, can really be helpful. Or, they can be misleading. I guess it depends on how you look at it!

I'm a statistic fan myself....I guess since 80% of my clients are engineers, that's a good thing :) Rarely do I throw all of the market in one pot when doing studies. I like to break it down in to small catagories so I can better pin point the true numbers.

If one knows a market inside out, upside down, etc., and does a very detailed analysis, it's pretty easy to get a fairly realistic price to start with. Buyers determine value. The interplay between price-condition-demand will determine wthe final price as dictated by a buyer and relevant comparables and current competition. Most data sets for comparison are too small in # (which makes a lot of stats irrelevant) and the properties chosen from this too small set can make it even more problematic.

NOV

2009

Jim,

Great post and I want to start by honoring a great mentor of mine, Seymour Schwartz - as Jewish stereo-typical businessman as you could ever write in a novel or a screen-play. He taught me a lot as I transitioned from military life to the world of business. Your final quote about figures and lying was something I heard every day from him...so trust me, I understand exactly what you are saying in this post.

When I do my market reports I too find the general data to be so off. I break down the transactions by type of transaction; i.e. short sale, REO, Standard, etc. Then I break down each of these types by financing type. So Short Sales many be dominated with Conventional Loans and REOs with FHA. Cash Buyers may be securing properties for 98.27% of list price where VA buyers are paying 110%. To say the typical (average, median, or enter your own salesy word) property is being transferred for 103.5% of List Price means nothing.

Thanks for this great look at the way our market is reported.

John

hmmm I think you should provide a link for that Victoria's Secret catalogue...:-)

This post makes you think about the value of stats and how they can be skewered...thinking this one over.....

Thanks for a post supporting stats and the responses on how they can be used. The other day there was a blog about how worthless they all are. They are only as good as the information you put into them.

For the CMA I am looking at them more, but not as, critical as an appraiser. I try to incorporate Gross Living Area and not square footage into the mix. Takes more time and only works with homes I have previewed or have additional information on but it gives a better indication of value in my eyes.

Jim:

Statistics are interesting but I think there is so much more that goes into the valuation of what to actually offer for a property. As in, what else is out there competing with it? I usually prepare two different types of CMA's to try to give as much information as possible.

Statistics can be a good tool if used properly. As an Air Force jet engine mechanic I was issued a tool box that weighed in at ... say ... 3lbs empty. By the time they finished issuing all the tools that had to go in it the weight had climbed to 28 lbs. Once on the job there were additional tools and "supplies" that were commonly found in a well equipped tool box that had to be added. This brought the final weight to nearly 50 lbs. Statistically the tool box now weighed more than double what the initial issue weighed. Does that make it worth twice as much? My assessment is that it did not change the usability of the box so it didn't add any "real" value to it. Read on ....

We started with the government issue standard tool box, which, by 98% popular vote, was nearly useless ... added "necessary" tools and hardware to make the box more user friendly when in reality there were only two tools, both from the original issue, that were used more than most ... a hammer and a BIG screwdriver! Think about it, if you don't have a wrench that fits or the space to use it, you can almost always fit a screwdriver blade in. A couple of good whacks with your trusty hammer on the handle of the screwdriver and the nut spins off, or on as the case may be. All fasteners had torque specs for tightening and holes for safety wire. So, you tighten the fastener to the recommended torque then grab the hammer and screwdriver to line up the safety wire holes. Sometimes you would need to pry two surfaces apart ... we weren't issued pry bars so we reached for the BIG screwdriver, the hammer provided a little more "persuasion". Now which tool box is worth more? Remember, they both took up the same square foot space.

The moral of the story is ... size isn't everything, except in the case of our screwdrivers. Real estate pricing based on square footage alone is like pricing my tool box based on the number of tools in it with no regard for its functionality. We need to look at the big picture and take into account as many variables as possible if we are going to come up with a fairly accurate CMA for any property.

As an Exclusive Buyer Agent I do not list properties but I find myself running my own CMAs on properties my clients are interested in. The variations can be pretty amazing but it give the buyer a much better perspective on the reality of the real estate market. They can make a much more informed decision and, hopefully, avoid what can sometimes be a ridiculous amount of "nickel-and-dime", "push-pull" negotiation.

Russ, I had to snicker to myself with your comment about the government skewing the data. I remember when they tried to reclassify fast food cooks as "manufacturing" jobs instead to show we had growth in that sector since they "manufactured" Big Mac's by adding two all beef patties, special sauce ...

Tim, I am glad you enjoyed the "picture" of the bell curve (grin).

Marc, your right, when two people are in a race did the person that didn't win come in last or second?

Kyle, you are right. I call it "my selective perception"; I will select what I allow you to perceive!

Elizabeth, sometimes even though I don't use stats too much personally in the process, I do know how to do them in case I need to "prove" my client has the wrong perspective. If I think they are too high in their wish price, I run numbers another way till I can show them a different conclusion.

Chris, I like the addition of economics into this too. Scarcity, demand, etc. Great points.

John, I like how you fine tune the sold price numbers based on types of sale. I will have to run those numbers in my market to see how they compare.

Liz, since you asked for it: www.VictoriasSecret.com When I Googled for images to pull this one there was a really funny one (if you mind is in the gutter) but it wasn't appropriate to post so I selected this one.

Ron, your tool box falls into another statistical model "the thud factor". I used to use it in writing proposals for government jobs. If I could say it using four 3" binders, it was perceived as better than just one binder. I knew the clients never read them all so I added in lots of supporting documentation so when I dropped it on their desk "THUD" impressive work! One of the top salesman at a previous copy used to go in with stacks of paperwork and would say I can go through all of this to show you how I reached my conclusions or I can summarize by saying "here is my awards for being top two years in a row at this, so should we cut to the chase and just talk about your home and what I can do for you?"

My middle son is great with numbers and he likes to have fun with them too. He assured me that "107 percent of statistics are made up on the spot"!

Garbage in, garbage out. I have been certified as an appraiser so I can understand what the appraisal valuation model is. I have gone through CCIM, which is statistical analysis intensive. I have 20 years of real estate experience and over 2000 homes transacted. I still emphasize the Estimate part of a CMA. I have not been in the houses, I cannot get the data for an exact comparison, if I don't have apprasial data I have to "trust" either the courthouse or even worse4, an agent saying what the SF is. I can find comps to make your home worth less, and I can find comps to make it worth more. The CMA is just one tool. meeting the clients needs, and making changes later a ccording to how the market reacts are others. In other words the CMA is not The Ten Commandments.

This is a very interesting post - I'm going to forward it to my supervisor as we were discussing CMA's just the other day.

DEC

2009

THis is very interesting. I expecially like the compariso to victoria secret. If it was only based on size, we wouldn't give anything for their products.

JAN

2010

I just had two spam comments on here that I deleted so the numbering sequence may be off. I think people are finding out about the Google Joice of Active Rain and using it to spam by inserting their weblinks here to increase their rankings. Please report and delete all such links on your posts! I think you even get a few AR Points for reporting it.

MAR

2010

Just had to delete another four spam emails. I think we need to put a TOS agreement saying anyone using AR to promote outside products goods or services agrees to pay a one time free of $100. I would have just earned $400. Collection is another story however.

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Jim Paulson (Owner/Broker)

Boise, ID

More about me…

Progressive Realty (Boise Idaho) www.Progressive-Realty.info

Address: Boise, ID

Office Phone: (877) 466-9648

Cell Phone: (208) 573-0471

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Jim Paulson is currently the Past President of the Ada County Association of Realtors. I try to use this experience coupled with my 20 years being a licensed Realtor to help bring you relevant information and hopefully an occasional thought provoking idea or two. I am a member of the Greater Boise Chamber of Commerce and and Accredited business with the Better Business Bureau. I can help with Idaho Foreclosures, Boise Idaho Short Sales, building a new home, or even using First time home buyer grants and niche lending prodcuts to buy or strategically sell homes. I am here for your real estate marketing needs! http://www.IdahoMLStours.com Http://www.Progressive-Realty.info Virtual Tour Inventory Widget

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