Section 2 Summary
This section set out how the office reads a market before it builds a comparative market analysis in it. A CMA whose comparables were chosen from a market area drawn where the buyer looks, and whose list price was positioned by the condition and direction of the subject’s own segment, follows a line of reasoning that a seller, an agent and the office can each trace from the subject to the recommendation. The sales reflect where the property competes; the range reflects what buyers in that competitive set have paid; the position reflects the market the listing is entering.
Property types that redraw the market area
For several kinds of property the buyer’s search does not follow the street map. The comparable pool stays in the subject’s town by default, because a neighboring municipality has its own taxes, services and assessment, so its sales reflect that town’s market. In Connecticut, which has few truly rural areas, rural and land-oriented property usually finds its comparables in town once the search goes back in time and widens within the town; the pool leaves the town only as the exception, when the property’s buyers would consider only properties of its own kind, such as an equestrian property, and the town has no sales of that kind that serve as good substitutes, with each step recorded in a memorandum. Waterfront and view property competes on the amenity, so the pool is drawn around the kind of water, the form of access and the character of the view, and the nearest sale is often the wrong one. For attached housing the complex, or the phase within it, is the market area, and the association’s documented condition decides whether the subject is typical of it. A two- to four-family competes with other small income properties in its rent tier, it is described by the facts of the property, its units, rents, leases and condition, never by who its buyers or tenants are, and the gross rent multiplier extracted from the sales confirms the range. Top-tier, over-improved and transitional subjects share a thin set, and the analysis of each goes back in time, widens within the town, or both, and reads the current listings closely, as support.
The order of operations and the two kinds of evidence
The office defines the subject, describes its buyer by what the buyer is shopping for, draws and tests the area, and only then opens the MLS. Closed sales inside the market area that pass the substitution test are primary evidence and establish the range, and three are the minimum, as they are for an appraisal under Fannie Mae’s Selling Guide. Actives, pendings, expireds, sales outside the area and older sales are support: they position the list price within the range and explain the edges of the analysis, and they do not ordinarily control the conclusion; in a thin market they carry more of the positioning.
Condition, direction and segment
The absorption rate is the segment’s closings per month over a trailing period, and months of inventory is the current supply divided by it. Direction is read from the indicators that lead, the count of new pendings, their days to contract and reductions before contract, price reductions among the actives and showings, before those that lag, the closed median, the sale-to-list ratio of closed sales and days on market, and figures are generally compared with the same season a year earlier. A pending is read without a price, because its contract price is not known until closing. All of it is relied on for the subject’s segment, with the town’s figures shown beside it, because a town median can move when the mix of what sells changes, and a listing priced from the town enters a market it is not in.
The written record
Each listing file ordinarily carries a written market analysis in five parts before the listing goes live: the market area and its support, the segment’s supply and demand, the trend indicators with a direction conclusion, the comparable pool with a reason for each sale used and set aside, and the pricing position with its range, recommendation and checkpoint dates. The record lets anyone who opens the file follow the reasoning from the subject to the recommendation.
What you can now do
A broker who has completed this section can identify the property types for which the market area departs from the ordinary pattern and explain how the pool is drawn for each, including the exception under which the search leaves the town and how that decision is documented; can distinguish primary evidence from support and apply the order of operations before a search is run; can calculate the absorption rate and months of inventory for a segment, read its direction from the leading indicators, and explain to a seller why the town’s figure does not apply; and can prepare a written market analysis part by part, in the order the listing file calls for. With the market read and recorded, the work of choosing and comparing the sales themselves begins on a foundation that is already on paper.
Downloadable: Property Type Reference, a one-page chart of how the competitive analysis changes by property type: where the search starts, what defines the competitive set, and which characteristics carry adjustments.