Start Before You Open MLS: Primary vs. Secondary Support

The search that produces a comparable pool is the last step in an order of operations, not the first. When the MLS is opened before the subject and its buyer have been defined, the search returns whatever is closest and most recent, and the analysis is then built from that list, with the market area drawn afterward to fit it. The office reverses the order. The subject is defined, the buyer is described in objective terms, the area where that buyer looks is drawn and tested, and only then is the data pulled. When it is pulled, it is sorted at once into two groups: the closed sales inside the market area that establish the range, and everything else, which supports the analysis without controlling it. This lesson sets out the order and the sorting, and how each appears in the analysis.

Four questions before the search

The first question is what the subject is. Property type, style, gross living area from the best available record, with its source noted, room count, lot size, age, condition, site and any feature that changes which buyer would consider it are recorded from public record, the listing history and the licensee’s own inspection, each with its source. A subject described loosely produces a loose search.

The second question is who the likely buyer is, answered in the only terms the analysis uses: what the buyer is shopping for. A buyer is described by property type, size band, price tier, condition expectation and the site or setting sought, never by age, familial status, lawful source of income, national origin or any other personal characteristic. “A buyer seeking an updated three-bedroom cape between $430,000 and $470,000 on a quarter-acre lot in a neighborhood setting” is a complete description of the likely buyer, and it is all the description the analysis needs.

The third question is where that buyer would look for a substitute. The answer is the competitive market area: the streets, subdivision or bounded area within which properties of that kind compete for that buyer, set by physical and economic boundaries that the data confirms rather than by a radius, and drawn within the subject’s town, because a neighboring municipality has its own taxes, services and assessment, so its sales reflect that town’s market. Comparable sales come from another town only as the exception, when the property’s buyers would consider only properties of its own kind and the town has no sales of that kind that serve as good substitutes. The fourth question tests the answer. The recent sales at the edges of the drawn area are checked against the sales at its center: where the edge sales sell in the same price tier, for the same kind of property, at similar marketing times, the boundary holds; where they do not, it is redrawn.

Only when the four questions have been answered does the search run, and it runs with a purpose. The criteria are set from the subject’s definition, the area is the one just drawn, and the window is the past twelve months, the period Fannie Mae’s guidance uses, with the most recent sales relied on first. The data arrives already sorted by the questions that preceded it.

Primary evidence

Primary evidence is a closed sale, within the competitive market area, of a property the subject’s buyer would have purchased instead. It meets the selection criteria on type and style, size, date, condition, site, and a sale between unrelated parties on the open market, and it needs only modest adjustment to be compared with the subject. Fannie Mae requires at least three closed comparable sales in an appraisal (Selling Guide B4-1.3-08), and this course applies the same minimum to the CMA before an analysis is presented; more are used when three do not settle the question.

The test for the primary group is the substitution question, asked of each sale: would the buyer of the subject realistically have bought this property instead. A sale that passes is primary. A sale that passes only with reservations is support. The size of the adjustments a sale would need is a second signal. When a sale requires very large adjustments to be compared with the subject, it is telling the analyst that it did not compete with the subject, and it belongs in support with the adjustment shown rather than in the primary group controlling the range. A primary group that is tight in both price and characteristics is what makes the range it produces reliable; a primary group with a wide spread contains support sales that have been promoted, or rests on a market area drawn too broadly.

Secondary support

Everything that is not a closed sale inside the market area is support. Five kinds of data belong there, and each does a particular job.

Active listings show what the subject will compete against for the buyer’s attention and, where they have sat, a price buyers have not yet accepted: after a number of days without a contract at its current price, buyers have generally not been willing to pay it. Pending sales show that a buyer reached an agreement while the property was listed at a given price; the contract price is not known until closing, and the days to contract, and whether the price was reduced before contract, show how the list price was received. An expired listing did not sell at its price during its listing term; a withdrawn listing was taken off the market before its agreement ran out and says less about price. Closed sales outside the market area show where the adjoining tiers sit and explain to a seller why the house across the highway is not on the list. Closed sales older than twelve months show how the market has moved and supply a market conditions note for the current sales; where, in a thin market, an older sale within the market area is the best indicator available, it is used with a market-conditions note and the reason stated, as the rural and over-improved examples earlier in this section show.

None of these establishes the range. An active listing is an asking price, a pending is an agreement that has not yet closed, and a sale from another area or another year is evidence of another market. What they do is position the list price within the range the closed sales produced, and explain the edges of the analysis. In a thin market they carry more of that positioning load, and the range is stated wider to reflect it.

Making the distinction visible

The analysis the office presents separates the two groups on the page. The primary sales appear together, each with a stated reason for its inclusion, and they produce the range. The support appears in its own section, each item labeled by kind and with a sentence on what it shows. The reasons for setting aside any closed sale that met the search criteria but not the selection criteria appear as well, because a qualifying sale set aside without a reason of record is likely to be asked about by a seller, a buyer’s agent or a later reader of the file, and the file answers it.

Application

A CMA is prepared for an updated 1,800-square-foot cape on a quarter acre, in a neighborhood bounded by the river and the state road. The “comparables” section lists six properties: a 1,750-square-foot cape in the neighborhood, closed four months ago at $452,000; a 1,850-square-foot cape in the neighborhood, closed two months ago at $438,000; a 1,800-square-foot cape in the neighborhood, active at $479,000 for 45 days; a 1,780-square-foot cape in the neighborhood, listed at $459,000 and under contract in eight days; a 1,900-square-foot cape across the river, closed last month at $495,000; and a 1,700-square-foot cape in the neighborhood, closed fifteen months ago at $415,000. The recommendation is $475,000, “supported by six comparables.”

Sorted, two of the six are primary: the closed sales in the neighborhood at $452,000 and $438,000. The active and the pending are support; so is the sale across the river, which is outside the market area, and so is the fifteen-month-old sale, which describes an earlier market. Two primary sales are not enough. Before the window is extended, the search inside the market area is run as the order of operations requires, and it finds a 1,820-square-foot cape in the neighborhood, closed five months ago at $446,000, that was not on the list. It becomes the third primary sale.

Before adjustment, the three primary sales closed between $438,000 and $452,000, and the range is built from them once they are adjusted. The support positions the list price within that range: the pending, listed at $459,000 and under contract in eight days, indicates demand near the top of the range, and the active at $479,000, after 45 days without a contract at that price, is a price buyers have not yet accepted. The fifteen-month-old sale at $415,000 supplies the market conditions note, and the sale across the river is retained to answer the seller’s question about it. The recommendation is $449,900. The original figure came from the active and the out-of-area sale, and the sorting made that visible.

Summary

The office defines the subject, describes its buyer by what the buyer is shopping for, draws and tests the area where that buyer looks, and only then opens the MLS, so that the data arrives with a purpose rather than supplying one. Closed sales within the competitive market area that pass the substitution test are primary evidence and establish the range; at least three are used, the same minimum Fannie Mae sets for an appraisal. Actives, pendings, expireds, sales outside the area and older sales are support: they position the list price within the range, explain the edges of the analysis and answer the seller’s questions, and they do not ordinarily control the conclusion; in a thin market they carry more of the positioning. Presenting the two groups separately, each with its reasons, is what makes the analysis readable to a seller, an agent and the office.