We’ve all heard the old mantra that real estate is all about “location, location, location.” Let’s take a look at what location is, and how it fits into appraising.
What is location?
The Dictionary of Real Estate Appraisal 6th Edition defines location as: “The relative position of a property to competitive properties and other value influences in its market area; the time-distance relationships, or linkages, between a property or neighborhood and all other possible origins and destinations of people going to or coming from the property or neighborhood.”
A perfect example of the importance of location in appraising can be found in The Villages in central Florida.
What’s “The Villages” like?
Huge. The development called “The Villages” has seventy-eight communities, each called a “village,” ranging in size from 100 to around 1,500 homes in each. In total, there are somewhere around 140,000 residents, and the home prices in these individual villages range from the low one-hundred thousand up to a couple million. In some cases, villages located near and/or adjacent to each other can vary significantly in price.
What accounts for the differences in price?
Location. Homes within the individual villages are generally similar to each other, with consistent price ranges. The location of the village and the subject’s location within its village are paramount criteria in an appraiser’s search for comparables. Of course, size and amenities play a role, as well as pools or lots that could accommodate a pool, but location is where it all starts.
Research concerns include: Does the specific village experience positive or negative “influences” such as proximity to shopping or the many varied golf courses? And then, is the property itself within that village located on a water body or a golf fairway, or are there negative influences such as traffic noise?
An appraiser not familiar with The Villages could easily over- or under-value a property by mixing villages. For example, let’s say the subject is a 3-bedroom, 2-bath, 2,000 square foot home with a two car garage on a typical sized lot. It would not be hard to find hundreds of homes with similar physical characteristics nearby; however, some might be located in the “wrong” village. Remember the characteristics of each village tend to determine what buyers are willing to pay. A knowledgeable or well-informed buyer will not pay $600,000 for a home surrounded by almost identical homes for which everyone else paid $300,000.
As appraisers, our job is to figure out what the typical buyer would pay for a property similar to the subject, based on what other knowledgeable buyers have paid for similar properties, and location is one of the biggest contributing factors in the decision process.
Are there “villages” in other markets?
Can we apply this “village” concept to other areas? Are there typically many villages or neighborhoods in and around most major cities? Do the same principles apply in comparable selection and resultant values? Of course they do!
Although more challenging in rural and small-town areas, the same concept applies there too: “location, location, location.”
An AVM dilemma
In a previous blog post, I mentioned a house I bought that I paid $48,500 for and spent $6,000 fixing it up to rent. It was shown in one of the major online real estate sites as being worth in the low to mid $300,000s for the better part of the following year. Why, I’m guessing, is because their model must have gone outside our small historic town of 696 houses to large newer subdivisions (one in another county, and the other a retirement oriented PUD) for sales data that was not at all comparable with my older house in town. The only other explanation might be they erroneously used waterfront sales, and those properties are in a “village” of their own.
Adjusting for location
McKissock offers multiple courses on deriving and supporting adjustments. If you haven’t take one, I suggest you do. The steps and specific techniques found in these courses would take up too much space to present in a blog post, but generally the techniques include paired data analysis, grouped data analysis, linear regression, ranking analysis, ratios, interviews, as well as sensitivity analysis, and can be classified as quantitative or qualitative analysis. A simple commonly used technique is comparing the average prices of say ten 3-bedroom, 2- bath, and 1,500 square foot homes in one neighborhood to the average prices of ten of comparable homes in another.
Enroll in our top-rated CE course, Supporting Your Adjustments: Methods for Residential Appraisers.
Concerns in hot markets
In crazy hot markets like this past year and the early 2000s, it takes a knowledgeable and experienced appraiser to properly select appropriate comparables. There might be sales prices as high as the subject property’s contract price, but are those truly comparable sales? And are they located in an appropriate or equivalent “village”? Back in the early 2000s boom, I’d hear appraisers talking among themselves saying they were often having to go significant distances into different neighborhoods to find sales prices as high as sales contract prices and were concerned they could be accused of “target shooting” the contract price.
It’s not uncommon for clients, brokers, and property owners to submit higher priced sales to appraisers in an attempt to increase an appraiser’s value opinion. The question becomes: Are those just sales with a higher price or are they truly comparable sales? And, most importantly, are they from an appropriate “village” or neighborhood/market area?
Written by Steven W. Vehmeier. Steve resides in Florida where he is a state-certified general real estate appraiser and a licensed real estate broker. He has taught appraisal qualifying and continuing education courses for multiple colleges, professional appraisal organizations, his own school, and McKissock Learning since the mid-90s, often spending over 100 days a year traveling and teaching. He has authored dozens of appraisal courses and textbooks, including several for McKissock, and has been a member or affiliate of eight national appraisal organizations, and national director of two.