What Fannie Mae Requires of a Comparable Sale

Most residential sales are financed, and a large share of residential loans are sold to Fannie Mae or Freddie Mac. For those loans, the sales that may be used to support a property’s value are governed by the Selling Guide, which is public and specific. The requirements are the standard a comparable sale is held to on a financed transaction. They are worth knowing at the broker level for one reason: an office whose comparable-selection standard matches them produces CMAs whose sales are more likely to hold up when the financing is underwritten, and an office whose standard does not may find that out at contract. They are set out below in the Selling Guide’s own language where it matters, from section B4-1.3-08, Comparable Sales. This course adopts the same discipline for brokerage pricing, because the CMA prepares the listing for the appraisal it is likely to meet on a financed sale.

The market area, as the guide defines it. The Selling Guide defines market area as “the geographic region, for a subject property, from which most demand comes and in which most of the competition is located.” That is the competitive market area in the lender’s terms. It is drawn by where the buyers come from and where the competing houses stand, not by a zip code or a radius, and every requirement that follows is applied within it.

At least three closed sales. “A minimum of three closed comparables must be reported in the sales comparison approach.” Additional sales may be reported in support. The three-sale minimum is the reason a CMA built on two sales and an active listing reads as incomplete to anyone who works with financed transactions.

Closed, not pending or active. The three required comparables must be settled transactions. “Contract offerings and current listings can be used as supporting data, if appropriate,” but they do not count toward the minimum. Closed sales carry the range; actives and pendings are support, useful for positioning the list price within that range, not counted as evidence of value.

Closed within twelve months, with exceptions explained. “Comparable sales that have closed within the last 12 months should be used in the appraisal; however, the best and most appropriate comparable sales may not always be the most recent sales.” The guide continues: “An older sale may be more appropriate in situations when market conditions have affected the availability of recent sales.” The point is the same one the course applies. An eleven-month-old sale of a nearly identical house on the subject’s street can be better evidence than a two-month-old sale that differs in size, style and location, because it needs fewer and smaller adjustments. A sale older than twelve months that is the best indicator may be used where appropriate, as in a rural area with little sales activity, with an explanation and a market-conditions adjustment. The CMA is built on that principle: the most recent sale generally reflects the current market most closely, and an older sale that supports a higher price does not ordinarily outweigh more recent sales of similar properties; the most recent and most proximate similar sales are relied upon first, and an older sale is ordinarily used only as the best indicator, with the reason written into the analysis and a reading of how the market has moved since that sale went under contract.

Similar in physical and legal characteristics. “Comparable sales should have similar physical and legal characteristics when compared to the subject property. These characteristics include, but are not limited to, site, room count, finished area, style, and condition.” Legal characteristics matter as much as physical ones: a house on a conforming lot and a house on a nonconforming lot, or a single-family and a single-family with a legal accessory apartment, are not the same product even when they look alike from the street. Finished area here means area measured consistently for the subject and every sale, with above-grade and below-grade area kept apart.

From the subject’s market area. “Sale activity from within the neighborhood is the best indicator of value as sales prices of comparable properties from the same location should reflect the same positive and negative location characteristics.” The guide also recognizes that the subject’s own neighborhood will not always supply enough: “Fannie Mae does allow for the use of comparable sales located in competing market areas, as these may simply be the best comparables available.” Two conditions come with that permission. The boundaries are not redrawn to fit the sales: the appraiser “must not expand the neighborhood boundaries just to encompass the comparables selected.” And the sales are identified for what they are: the appraiser “must indicate the comparables are from a competing neighborhood and address any differences that exist.” That permission belongs to the appraiser under the guide, and it comes with conditions: a sale from across a parkway is not used silently, and a market area redrawn after the search so that a higher sale falls inside it is the thing the guide names directly. The method this course teaches for a CMA is narrower. The search starts in the subject’s own town, because a neighboring municipality has its own taxes, services and assessment, so its sales reflect that town’s market, and 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 market area is drawn from the properties that compete with the subject, and a sale from a different market area is ordinarily set aside rather than adjusted.

Competitive with the subject and appealing to the same buyers. The sales chosen should be “competitive and appeal to the same market participants” as the subject. That is the competition-for-the-same-buyer test in the Selling Guide’s words.

On the appraisal report. The appraisal report states the price range, low and high, of comparable sales in the subject’s market. Some appraisers also list the additional sales they analyzed but did not use in the report; others keep those sales in the workfile. Either way, a lender reviewing the report can see the range and can question why sales at the lower end of that range were not used. A lower-priced sale that is otherwise highly comparable is not left out because of its price. The CMA follows the same discipline, because a listing sold with financing is likely to meet that appraisal.

Lender overlays. Fannie Mae’s Selling Guide sets the minimum a lender must meet to sell a loan to Fannie Mae, and FHA, VA and USDA set the minimums for the loans they insure or guarantee. A lender may add its own, stricter requirements on top of those minimums. These are called lender overlays. An overlay can call for more than three closed comparable sales, sales more recent than the guide requires, a second appraisal or a field review above a certain loan amount, a higher minimum credit score, or a narrower list of eligible property types. Overlays differ from one lender to the next and can change without notice, and they are not published in the Selling Guide. Two buyers financing the same house through two lenders can therefore face different appraisal and underwriting conditions. For pricing, the consequence is that the Selling Guide is the floor, not the ceiling: a CMA built to the guide’s requirements, with the most recent and most similar sales, prepares the listing for the requirement every lender starts from, and the buyer’s lender confirms any overlay that applies to its loan.

New subdivisions and projects. For a property in a new or recently completed subdivision, condominium project, or planned unit development, the requirement is at least one settled sale from inside the project and at least one from outside it, with a third settled sale that may come from either. The rule exists to test whether the builder’s prices are supported by the wider market, and it is the rule a broker listing new construction or a resale in a new project should expect the financing to follow.

Foreclosures and short sales. “It is acceptable to use foreclosures and short sales as comparables if the market data indicates they are the best and most appropriate sales available.” The report must then address “the prevalence of such sales in the subject’s neighborhood and their impact,” along with any difference in condition between the distressed sale and the subject. A distressed sale is not excluded automatically, and it is not included without comment. Where bank-owned sales and short sales are a meaningful part of a market area’s activity, they are part of what buyers there pay; where one sits alone among two years of ordinary sales, it describes that transaction rather than the market.

Applied to a resale. A CMA is being prepared for a 1,880-square-foot colonial built in 1985 on a 0.46-acre lot in an established subdivision, with an updated kitchen and original baths. The search of the subject’s market area returns six candidates.

Sales 1 and 2 are in the subject’s neighborhood, recent, and similar in finished area and style; Sale 1 matches the subject’s updated kitchen, and Sale 2, with an original kitchen, is adjusted for that difference. Sale 3 is across a collector road, but the sales in the two subdivisions show the same price range, house type and era, and similar days on market; it is within the market area as the guide defines it. Those three are closed, within twelve months, and similar in site, finished area, style and condition, which satisfies the minimum and the characteristics the table shows. The pending sale is support: it shows that a buyer went under contract while the house was listed at $529,900, slightly above the closed sales, which bears on where within the range the list price is positioned; its contract price will be known at closing. Sale 5 is larger by 470 square feet, on a different site, in a different neighborhood, and although it is also a colonial, those differences set it apart from the subject; it is set aside. Sale 6 is the only bank-owned sale in the subdivision in two years, so it does not describe the typical sale there, and its condition differs sharply from the subject’s; it is set aside with that reason noted.

Applied to a new subdivision. A broker is listing the resale of a two-year-old colonial in a 24-lot subdivision whose builder has closed eighteen houses and is still selling. Inside the project, the builder’s closed sales of comparable models run from $689,000 to $712,000. Outside it, resales of similar colonials five to ten years old within the market area have closed between $640,000 and $665,000. The requirement for settled sales both inside and outside the project means a financed contract on the resale is ordinarily tested against both groups. If the inside sales sit well above what the outside sales indicate once age and condition are accounted for, the difference is a question the analysis has to answer before the listing goes out, because the inside sales may reflect the builder’s incentives or upgrade packages rather than what the market pays for the house. The builder’s remaining new inventory, with a warranty and a choice of finishes, is also the resale’s most direct competition, and it is read as support for positioning in the same way as any active listing. Builder concessions recorded on the closed sales are checked, since a $706,000 sale with a $20,000 closing-cost credit indicates less than its price suggests.

How it applies. Set beside the office’s selection criteria, the Selling Guide’s requirements are the same list in more formal language: three or more closed sales, within twelve months, from the subject’s market area, competitive for the same buyers, with any departure explained. An office whose CMAs are built to that list produces ranges more likely to be supported when the property is appraised, because the Selling Guide applies the same rules to the sales an appraisal uses. When a CMA and the outcome of a financed contract diverge sharply, the first place to look is whether the CMA departed from the list.