In a competitive market, how do we know how much to bid? Real estate professionals use a method called Comparative Market Analysis (CMA), or sales comparison analysis, to help buyers figure out a reasonable price range that a property of interest falls into.
To give buyers a ballpark estimate, we pick out similar properties from the recent sales near a property a buyer is considering and make some adjustments based on the features of the comparable properties (square footage, distance to public transit, parking, private deck, private patio, renovation quality, projected appreciation, finished basement, etc). We usually pick 2-3 properties sold within 0.3-0.5 miles of the property of interest in the past 3-6 months. The more recent the sale, and the closer the property, the more relevant the comparable. Also, the property type is relevant to the analysis as well. If we are looking at a condo in a 2/3 family building, the CMA is going to take into account other condos in a 2/3 family building, but not apartments in a large complex or townhouses. The nature of living in a 2/3 family building is quite very different from living in a large complex with 20-30 units.
Besides making adjustments for features such as property type and sale date, we make some adjustments based on the history of bidding wars. For example, condos with loft-style high ceilings in Central Square or Kendall Square often get bid up 10-15% higher than the comps. Such features are not necessarily quantifiable, but very important to look at in a bidding war situation in order to analyze consumer behaviors. Loft-style high ceilings in such locations are so rare (and the demand so high) it’s almost like bidding for a rare artwork in an auction.
Buyers often ask me this question: how much higher than the list price should I bid? I would say a property can sell above or below list price at any time of the market, and the best way to figure out the best price to offer, is to look at the CMA as an objective report that stands apart from the list price. The list price itself is meaningless from a sales comparison perspective.
For example, if a property is priced too high by an inexperienced agent, even if you get 20k below that price, it doesn't mean you are necessarily getting a good deal. If a property is intentionally priced low to create a bidding war, you can still get a fair deal even if you bid well above asking price. So I would take asking price with a grain of salt and focus on the final sales price. Otherwise it can get too confusing. The best way to get an objective sense of what to bid, is to ignore the asking price of all the properties and just look at the final sale price. Asking price can vary greatly based on the particular strategies of the sales agent and the season of sale. The final sale price can be higher or lower than the asking price, but being higher or lower than the asking price doesn't necessarily mean you get a good or bad deal.
Keep in mind that in a competitive seller’s market such as Cambridge, Somerville, Brookline, Arlington, Belmont or downtown Boston, buyers are often faced with multiple offers or bidding war situations. If a property is within 5-10 minute walk to the T, we often see sale prices that fall outside of the reasonable price range indicated by the sales comparison approach. In bidding war situations, it is best to talk to an experienced real estate agent who knows the market well.
Tania Wu, Top Producer at Boston Luxury 2017