The Six-Step Process – Agents Advantage Real Estate Academy

Competition rather than location, substitution as the test, and the factors that shape where a property competes are the reasoning behind the method set out here. The six-step process is a structured way of thinking that produces a market area capable of supporting a price, ordinarily applied in the same order to each property, regardless of type or market. As the office’s standard method, it is also the sequence any market analysis in the file follows.

The order matters because each step supplies what the next one needs. When data is pulled before the property and the demand it competes for have been established, the search tool defines the market area instead of the property. The process requires the thinking first and the data second, so that the data confirms and refines a hypothesis rather than creating one by accident.

Step 1 — Define the subject property clearly

The first step characterizes the property rather than merely inventorying it. A list of fields from the listing is raw material; the characterization states what the property is, what it offers, and where it sits relative to the marketplace. Two properties identical in bedroom count and square footage can sell at different price levels if one has been fully renovated and the other retains decades-old finishes; they remain in the same market area, and the analysis adjusts for the condition difference. A complete characterization reads the fundamentals together: property type and architectural style; size in both living area and site; age and, more importantly, level of updating, whether original, cosmetically updated or fully renovated; condition and quality of finish; functional utility; and setting and site, since a busy road, a wooded lot or a particular view changes how the property competes. The step closes by placing the property in the price distribution of similar properties in the area.

Step 2 — Identify the market position the property competes from

The second step is the most direct application of substitution. What a purchaser of the subject would weigh as a genuine alternative is determined by the property and the terms of the transaction, never by any assumption about who the purchaser is. The analysis works from the characteristics in Step 1, the price point they place the property at, and the use the property serves. It does not profile the purchaser by age, familial status, lawful source of income or any other personal characteristic; doing so is unsound method, a guess standing in for evidence, and a violation of fair housing law.

What does the work is the property’s market position, and several objective dimensions move it. Price point sets a broad boundary: a property competes with others at the same price point and rarely with properties a tier above or below. Type and configuration narrow it further; a detached house, an attached unit and a multi-family building compete for different demand, as do a compact property and a substantially larger one even at a similar price. Condition and level of updating can place a property at a different price level than its neighbors hold, within the same market area, and that difference is adjusted for rather than treated as a separate market. Setting divides again, since an interior-street property and one fronting a thoroughfare are not interchangeable at the same size and price. The step is complete when the analysis can name two or three areas or groups of properties that occupy the same market position as the subject. If it cannot, the property is characterized again.

Step 3 — Ask where else that buyer would look

The third step applies substitution to geography and type: where else would a purchaser of the subject genuinely look if the subject were not available? Not where the market area is most convenient to assemble, and not what the search tool returns first, but where the properties identified in Step 2 actually sell, accounting for location, property type and price point together. The answer is written down: the areas, the property types and the price range that define the position. That written statement is the working draft of the market area, a hypothesis formed before a single search is run, which the data will then confirm or refine. Writing it first is what keeps the search tool from quietly defining the market area in place of the property.

Step 4 — Review actives, pendings and solds together

The fourth step gathers three kinds of evidence and reads them together. Closed sales provide market history, what buyers actually paid over the recent period and the days on market the MLS records; they are the most solid evidence and, for the supported price range, the primary one. Pending sales show which listings, at which list prices, have gone under contract and how many days each took to reach a contract; the contract prices are not known until closing, and the pendings often give a more current read on activity than closed sales a month or two old. Active listings show the competition the buyer faces today. A buyer is not purchasing a sale that closed two months ago; the buyer is choosing among what is available now, against the backdrop of what recently sold and what is under contract, and a price read from all three reflects the market as it stands rather than as it was.

Step 5 — Eliminate false competitors

The fifth step removes from the working pool the properties that look nearby or similar but do not reflect where the subject competes. A false competitor survives a proximity or size filter yet fails the substitution test: a property occupying a different market position, an entry-level house among properties a step up; a property in a setting the market does not treat as interchangeable, a house on a thoroughfare against one on an interior street; or a property across a line inside the town, such as a parkway or a price tier, that market data shows functions as a boundary. Under the method of search this course teaches, a property in a neighboring town in a developed market is not a member of the comparable pool, even when a buyer considers both towns, 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. A difference in condition is not, on its own, grounds for setting a sale aside: a renovated house and an original one in the same market area are compared, and the condition difference is adjusted.

Timing requires care, because an older sale is not automatically a false competitor. A sale that genuinely belongs in the competitive set and simply closed under different conditions is a valid comparable; the time difference is handled with a market-conditions adjustment and the sale is weighted accordingly. The standard for the step is to remove the properties that would distort the pricing logic if they stayed, not every imperfect one.

Step 6 — Draw the market area and test it

The sixth step translates the analysis into a working definition of the competitive zone. The definition need not be a line on a map; it is a statement of the area and the property types that reflect where the property competes: for example, updated single-family houses of roughly 1,600 to 2,000 square feet, built within a stated range of years, in the specific neighborhoods where such properties sell, within a stated price range. The definition is then tested against five questions: does the area contain the properties that genuinely compete with the subject; has any competition within the town been excluded because it falls outside a geographic line, such as a street or a subdivision edge; has any area or property type been included that does not compete; is the area too broad, mixing market positions; and is it too narrow, excluding competition just beyond the boundary. Where a question exposes a flaw, the area is refined and tested again.

Application

A listing file for a 1,650-square-foot raised ranch on a third of an acre shows a search run before anything else was written. The analysis starts over with Steps 1 through 3 written on one page. The characterization places the house in the lower-middle of the neighborhood’s price distribution, original apart from a new kitchen, on an interior street. The market position is updated-kitchen, otherwise original raised ranches and capes of 1,500 to 1,900 square feet at roughly $385,000 to $425,000. The written answer to Step 3 names two adjoining subdivisions on the subject’s side of the rail line where such houses sell.

Only then is the search run. It returns seven closed sales, three pendings and four actives. Step 5 sets aside a sale across the rail line where the data shows a price break, noted with the reason. A fully renovated ranch on the subject’s side of the rail line, closed at $468,000, stays in the pool: it is in the subject’s market area, and its condition difference is adjusted for at the grid rather than treated as a separate market. The other sales converge between $392,000 and $418,000, the pendings are listed inside that band, and two of the four actives are priced above it and show more than sixty days on market in the MLS. The market area as tested holds, and the range presented to the seller is one the office can explain in one paragraph.

Summary

The six-step process defines the subject, identifies the market position it competes from, asks where else a purchaser at that position would look, reviews closed, pending and active listings together, eliminates false competitors, and draws and tests the resulting area. The sequence is the point: the property defines the market area, and the data confirms or refines it, not the reverse. The market position at Step 2 is read from price point, type, condition, setting and use, and never from any characteristic of the purchaser.