The Competitive Market Area – Agents Advantage Real Estate Academy

The first decision in a CMA is where the sales will come from, and it is made before the MLS is opened. The decision is the competitive market area, and because it governs everything that follows, it is stated here in full.

A competitive market area is the area within which the subject property competes for buyers. It consists of the properties that a buyer of the subject would consider as alternatives, and the geographic area those properties occupy. A market area is defined by competition for buyers, not by a zip code, a circle drawn around the subject, or a town treated as a single market. A CMA ordinarily draws its comparable sales from the subject’s town, and within the town the market-area boundaries are confirmed by data rather than assumed from the map.

A buyer looking at a 1,600-square-foot colonial on a quarter-acre lot generally looks at other properties of that kind within a certain reach, and generally does not look at properties outside it, even when those properties are physically closer. The reach of that buyer’s search is the subject’s competitive market area.

Consider a town with a parkway running through it. On one side, a neighborhood of 1,400- to 1,800-square-foot houses on quarter-acre lots, selling between $395,000 and $430,000. On the other side, a neighborhood of larger houses on larger lots, selling between $475,000 and $515,000. The two neighborhoods are minutes apart and share a town name. Their sales do not overlap in price, and the sales show that the two do not compete. Each neighborhood is a separate competitive market area, and a sale from one is not a comparable for a property in the other.

The market area is identified by asking where the buyer of the subject would realistically look for an alternative. Sometimes the answer is a subdivision. Sometimes it is a defined set of streets bounded by a highway, a river, or a change in the age and size of the housing. Where houses on acreage are spread out, it may be a distance from the subject within the town rather than a named area. Generally, the boundary is set by where the competing properties are, and it is written into the analysis so that anyone reading it can see where the sales came from and why.

The factors that set the boundary

Three groups of factors determine where a property competes, and they are read together. Location factors are physical and geographic: highways, rail lines, rivers and commercial corridors that interrupt a neighborhood; access and commuting routes; and development patterns that leave blocks of similar houses built in the same decade. Property factors are the subject’s own characteristics: type, style, age, size, condition, quality of construction and site. A 1,500-square-foot ranch and a 3,200-square-foot colonial on the same road do not compete, because, within a property type, size is usually the first line that divides one group of competing properties from another. Market factors belong to the current market: the price tier the subject falls in, the supply of listings and pace of sales in that tier, and any new construction offering an alternative. A boundary is real where these factors change.

Reading a boundary from the sales

Whether a line on the map inside the town is a market-area boundary is a question the sales answer. Sales on each side over the past twelve months are compared for the price level of similar houses, days on market, and the relationship of sale price to list price.

Consider a subject on the west side of a river that divides a town. West of the river, eleven sales of 1,400- to 1,900-square-foot capes and ranches closed in the past year between $338,000 and $372,000, with a median of 21 days on market. East of the river, nine sales of houses of the same size, age and style closed between $341,000 and $369,000, with a median of 24 days. Where the sales line up this way, the river divides the map but not the buyers, and the market area includes both banks. Had the eastern sales of the same houses closed between $395,000 and $430,000, the river would be a boundary, and those sales would be set aside.

When the property type changes the shape

Condominiums. A condominium unit competes first within its own complex and also with complexes offering a similar unit, similar amenities and a similar common charge; in a small complex there is no fixed order, and the search goes back in time, opens to those complexes, or both. A unit three buildings away in the same complex is usually a stronger comparison than one across the street in a different complex, because the unit comes with the association, its fees, its reserves and its rules. The market area is drawn by project rather than by street.

Property on acreage. Where houses are far apart, so are the properties that compete, and the market area may take in much of the town. Road frontage, well and septic, topography and usable land determine which acreage properties compete. Acreage alone does not take the search out of town.

Waterfront. The market area is often narrow: the same body of water, the same kind of access (direct frontage, deeded rights or association access), and similar frontage. A few sales on the same water usually say more than a larger number from mixed settings.

New construction. A house in a new subdivision competes with the builder’s other lots and plans, with other new construction in its price tier, and with recently renovated resale houses of similar size, where sales show buyers choosing among them.

Two- to four-family property. A multi-family building competes with buildings of similar unit count and unit mix, and its market area is set by where those buildings are, often a few defined neighborhoods rather than a single subdivision.

Two boundaries that need a specific word

The method of search this course teaches starts in the subject’s own town. A buyer may consider more than one town, but the comparable evidence comes from the subject’s town, because a neighboring town has its own taxes, services and assessment, so its sales reflect that town’s market; the search leaves the town only as the exception, when the property is one whose buyers would consider only properties of its own kind, such as an antique home, a log home or an equestrian property, and the town has no sales of that kind that serve as good substitutes. The lines tested with sales lie within the town: highways, parkways, rail lines, rivers, tax-district lines, school-district lines where a town has more than one, and price tiers. Where a town has more than one school district, buyers may take into account which district a property is in. If sales show a difference across that line in price or days on market, the analysis records the difference in the data. It does not describe or rank the schools, the neighborhoods or the people on either side. The market area is established from the properties of this type that compete at this price, which the sales history shows.

How it applies. A CMA states its market area in a sentence: the boundaries, and the reason the properties inside them compete with the subject. Every sale in the analysis falls inside that boundary, or the analysis says why it does not. A CMA that has no stated market area, or whose sales scatter across the town, shows its first departure before anything else in it is read.

A market area statement for a 1,750-square-foot cape built in 1962 on a half-acre lot reads as follows. The market area is the subdivision and surrounding streets between the state highway on the east and the brook on the west, consisting of capes, ranches and colonials of 1,400 to 2,000 square feet built between 1955 and 1975 on lots of a quarter to a half acre, which sold between $455,000 and $485,000 over the past twelve months. Sales east of the highway, where houses are larger and sell above $500,000, are excluded because they do not compete for the subject’s buyer.

The statement changes what the search returns. A default half-mile radius search from the same subject produced fourteen sales: six were condominium units, three were east of the highway, and five fell inside the stated area. Three further qualifying sales inside the stated area lay just beyond the radius and did not appear at all. When a stated area produces too few sales, it is expanded or the search reaches further back in time, whichever yields sales that compete with the subject, and the expansion is written into the statement.