Section 1 Summary and Application Exercise
This section set out where a property competes, how the market that competition takes place in establishes value, and what the broker produces from the market’s evidence. Each part of it answers a question asked of a market analysis before a seller sees a range.
Where the property competes
A market area is the geographic and competitive space in which a property attracts similar buyers and competes with similar alternatives. It is defined by competition, not by location, and the shortcuts that stand in for it, a radius, a ZIP code, a town treated as a single market, describe convenience rather than the buyer’s choice. The principle of substitution supplies the test: a buyer pays no more for a property than the cost of an equally satisfactory substitute, so a candidate belongs in the competitive set only where a buyer of the subject would genuinely have chosen between the two. A substitute is not the same as a similar house, and the difference is read from what the market records in price, days on market and where sales concentrate, not assumed.
What shapes the area, and how it is drawn
Location factors set the geographic frame, property factors establish the subject’s market position, and market factors govern how the first two play out under current conditions. Administrative lines inside the town, such as tax-district lines or school-district lines where a town has more than one, count as market-area boundaries only where the data shows the two sides behaving differently, and the analysis records the difference without characterizing the places or the people on either side. A buyer may consider more than one town, but under the method of search this course teaches 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’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 six-step process makes the work repeatable: define the subject, identify the market position it competes from, ask where else a purchaser at that position would look, review closed, pending and active listings together, eliminate false competitors, and draw and test the area. The seven recurring errors, read as questions, are the check ordinarily applied to each CMA before a range is presented.
How value works
Price is what a property sold for; cost is what it takes to build or replace it; market value is the most probable price in a competitive and open market under the standard conditions of a fair sale. The market establishes value and the appraiser measures it. The broker produces a price range and a list price recommendation, and describes the result in those words. A comparison rests on the ownership interest conveyed and the property type, and selecting comparable sales starts with the property’s biggest draw, with sales similar in style when possible. The principles of value describe the market’s behavior, and each shows up in price. Highest and best use, tested as legally permissible, physically possible, financially feasible and maximally productive, is not a conclusion a CMA reaches; the broker recognizes the listing that is being paid for as land or as a conversion and prices it with the evidence of the use the market is paying for.
What you can now do
A broker who has completed this section can read a market area and say where it was drawn by competition and where it was drawn by convenience; can apply the substitution test to any candidate sale and state the reason for its answer; can tell a seller, in plain terms, why a house across the highway is not on the list; can keep price, cost and value separate where a seller has mixed them; and can recognize the listing that is not what it appears to be before the price is set. The exercise below asks for that work on paper.
Application exercise
Complete the following on a single page, in the form it would take in a listing file. The exercise is not scored; the Knowledge Check that follows is.
The subject is a 1,700-square-foot cape, built in 1962, with three bedrooms and one and a half baths, on a 0.3-acre lot on an interior street. The kitchen was replaced two years ago; the baths and windows are original. The house is held in fee simple, owner-occupied, and sits in a subdivision of roughly 120 capes and ranches of 1,400 to 1,900 square feet built between 1958 and 1966. A state highway forms the subdivision’s northern edge. North of the highway is a subdivision of 2,200- to 2,800-square-foot colonials built in the 1990s on half-acre lots. The town line runs a half-mile to the east; across it, in the neighboring town, a similar subdivision of capes and ranches was built by the same developer in the same years. Sales data for the past nine months shows the subject’s subdivision closing between $372,000 and $418,000 with a median of 19 days on market; the colonials north of the highway closing between $585,000 and $640,000; and the similar subdivision in the neighboring town closing between $368,000 and $411,000 with a median of 22 days on market. The neighboring town’s mill rate is materially different.
Write the following.
- A one-paragraph characterization of the subject that states its market position: type and interest, size, condition, setting and price tier.
- A written definition of the market area in one or two sentences: the area, the property types and the price range.
- A statement of the support for leaving the colonials north of the highway out of the market area, stating what the data shows; and, for the subdivision in the neighboring town, a statement of whether a buyer of the subject might consider it, whether its sales belong in the comparable pool that supports the price, and the reason for each answer.
- The seller’s paragraph: three or four sentences, in the words the broker would use, explaining to the seller why the colonials to the north are not on the list and why the sales in the neighboring town are treated as they are.
The downloadable exercise sheet carries the fact pattern and lined space for each of the four parts. A completed exercise can be read in two minutes and leaves no boundary without a stated reason.