What Is A Competitive Market Area?

Competitive Market Area Explained

A competitive market area is something that I write about quite a bit when discussing comparable sales selection. It answers a lot of questions about where agents can look for sales when pricing a home.

Competitive Market Area

The sales comparison approach is the most recognized approach for non-appraisers. Most people know what a “comp” is and vaguely know how appraisers use them in an appraisal.

There is some misunderstanding, however, about what are acceptable areas to look for comparable sales. When speaking with agents about comparables I explain to them that it is okay to expand the narrow search parameters that they sometimes use.

Many agents cannot find any recent sales because they have limited their search to the immediate subdivision or neighborhood. While it is preferable to use sales from these areas it is not necessary to stay within this confined area if there are no recent sales.

Principle of Substitution

Before discussing what a competitive market area is, it is also important to know about the principle of substitution. This principle states that a buyer will not pay more for a property than they would for another equally desirable property.

For example, if they can buy another home with similar size, features, quality, location, or school system for $200,000 then it would not make sense to offer yours for $225,000. In today’s market where information is readily available buyers are very savvy and they know what is available on the market.

A Closer Look

Now that you know a little bit more about the principle of substitution and that a comp search does not necessarily have to be confined to the immediate area we can talk a little more about the competitive market area.

A competitive market area is one that the buyer would consider if there were no homes available for sale in the subject subdivision or neighborhood. As you might expect this area has homes that are similar in age, quality, design, appeal, price range, school system, and transportation access points.

The competitive market area does not always have to be close in proximity to the subject property. A common misconception is that comps cannot be located more than one mile away.

Fannie Mae has no distance requirements for comparable sales. They will accept more distant sales if they represent the best indicator of value for the subject property. In addition, if there are any value differences related to the location they must be applied to the sales in the sales grid.

While Fannie Mae does not have any distance guidelines individual lenders may include their own requirements that must be met. Just a note: sales cannot be made up (duh!) so if there are no nearby sales and it is necessary to use comps that are further away then so be it, however, it must be explained within the report why this was done.

In the past, when this has happened to me, the lender was usually okay with the appraisal as long as I documented why I used the comps I did.

In The News

A little side note that I would like to add relating to a competitive market area is one that relates to a current topic in the news. This new topic has to do with perceived bias in the appraisal profession.

One argument that I have heard relating to this bias is that appraisers are using comps from areas that do not “help” the value of the subject property. Those who feel this way believe that comps from “superior” areas should be used in order to help the subject property appraise for a higher amount.

The only reason that I include this topic is that if appraisals are done this way then it would go totally against the principle noted and the concepts discussed. By looking into “superior” areas in order to appraise homes for a higher value you would most likely not be using homes from an area that is similar in age, quality, design, appeal, price range, school system, and access points.

When appraisals are done in this manner they cease to be unbiased and jeopardize the integrity of the financial system of the country. What do you think?

Question

Do you have any other questions about what a competitive market area is? If so please leave a comment below and as always thanks for reading.

If you liked this post subscribe by email (or RSS feed).

Comments

  1. Government and society influence value. Attempting to bias the system to benefit or correct redlining of the past is contrary to good risk analysis and principles of appraisal. I have yet to hear anything in the media addressing what is a socio-economic issue, and not a systemic appraisal problem. But some are using terms such as “low appraisal.” If there is any bias, it’s the opposite; I see the sales price on the contract and it is market evidence to be considered. If racist appraisers are low-balling a neighborhood the state’s licensing agency would probably investigate, not to mention a host of federal agencies. Improve the neighborhood and the values will likely follow.

    • You make a lot of good points, Christopher. Thanks for sharing your thoughts. I think there is a lot of validity in your last comment that if you improve the neighborhood the values will follow. I think what may be happening with all the stories we are seeing is that you’re going to see a lot of public pressure put on appraisers to aid in improving property values in some areas by twisting common appraisal methods but then that would take away the unbiased nature of our profession and it could come back to bite everyone.

  2. There has been lots of discussion lately about comp selection in the media and academic circles. I’m listening and as always doing my best to reflect the market and avoid any bias.

    • Very true, Ryan. I’ve heard comp selection 99% of the appraisal process. It would be so easy to pick comps from nearby but totally different areas to influence value but then we would not be unbiased. Appraisers must stick to their guns and utilize the best data that reflects the market.

  3. Jeffery P Gossett says

    Good article Tom!
    The closer to subject proximity and time is still the best. If you have to go out of subject’s area/time span then you should be required to make adjustments to equalize. This market is challenging evaluating value. If the buyers consider future value when interest rates are 6% then this market may cool.

    • Thanks for sharing your thoughts, Jeffery. I agree that recent and nearby sales are the best when they are available. I see some agents getting hung up on staying within a block or two from the subject which is not necessary. By expanding search parameters within acceptable guidelines they can encompass a larger area from which to choose comps.

Trackbacks

  1. […] What Is A Competitive Market Area? – Birmingham Appraisal Blog […]

Speak Your Mind

*

Call Now Button

Sign up and get valuable content!

  • Get local real estate market data
  • Learn valuable information from a seasoned appraiser
  • Find out what adds value to your home

I respect your privacy. Your information stays with me.