Traditional appraisal says we should describe and analyze the subject neighborhood.
In residential form reports, there is a section devoted to the neighborhood.
In general narrative reports, there is a section devoted to the neighborhood. In fact, often there is great discourse about the town, the city, and greater things. We have often heard criticism about these long descriptions of areas that seem to have little to do with the goal of ‘supporting’ a personal professional opinion of market price (called ‘value’).
In traditional valuation dogma, the next step is picking comps. Comps for overall, comps for income, and comps for land and costs. Pick comps.
A neighborhood is defined as a group of complementary land uses. So obviously, if you are appraising a house, or a corner office, you need to delete to pick comps. Delete the gas stations, the apartments, the stores, and the parks, any hotels, the paid parking lots, and many other uses and non-similar properties. Most of all, you need to get rid of those not-similar houses. (Or the non-corner short office buildings.)
Everyone knows that picking comps is less than the neighborhood. (Reduction of the data set.)
Except when it is not! Sometimes you need to go outside the neighborhood to get a good comp. (Expansion to “enough” comps.)
Traditional valuation: “Always pick comps either inside, or outside the neighborhood.”
Evidence-Based Valuation: The ideal data set is the Competitive Market Segment (CMS)©. The similarity is established by use of the (data science) five dimensions of similarity. This idea leads to one or more of several similarity algorithms used in analyses.
In the traditional “valuation process” the appraiser first picks comps based on their experience, training, and “knowledge of the market.” Although a subjective process, the appraiser is admonished to be diligent in data selection to pick sales which are similar, competitive, and “able to be compared.” The ultimate test in current standards (USPAP), is to be “credible” defined as “worthy of belief.” Reliability is not mentioned or defined.
In EBV (Evidence Based Valuation)©. The competitive data set is defined from market behavior evidence, not opinion. Data science is rife with algorithms and logic designed specifically to this purpose. The key benefit of market-derived data sets is that the process can be replicated, and therefore is reproducible. Reproducibility is a key element of valid scientific-analytic research and decision-making.
Admittedly, portrayal of a neighborhood can help in an understanding of the nature of the subject’s neighborhood as compared to other neighborhoods. And perhaps an understanding of the subject land use to other nearby supportive land uses.
On the other hand, depiction of a neighborhood is the basis of much current debate. “Neighborhood” boundary lines have been equated to bank red-lining. Neighborhood restrictions have (in the past) formed the basis of restrictions on certain buyers, including the exclusion of certain races, religions, national origins, and even sexual preferences.
There is strong argument to replace the “Neighborhood” section of appraisal reports with definitive, objective analysis of the actual CMS, the Competitive Market Segment©, in its place.
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April 20, 2022 @ 3:01 am
I think this is a very touchy subject especially in light of appraisers being charged with racial bias; maybe we should modify the Neighborhood section with a narrative that describes what we see and what is actually there, ie, is there an abandoned gas station? Is there an abandoned factory of some sort? Are there boarded up homes? Are there burned out homes? These are the things that might deter a potential buyer from buying a home in any given area. Don’t look at the inhabitants of the neighborhood, look at the subject property and what is around it. On the other hand, a homeowner might want to fix up their home to be far superior to what the majority of homes look like on the outside, we probably have no idea what they look like on the inside, we have to “assume” which is probably wrong in many cases. Like I said this is a very touchy and controversial topic.
April 20, 2022 @ 6:59 am
We are inundated with available information. I remember my boss saying to me get the appropriate information and complete the assignment – 50-years ago. Well, today you could spend hours if not days seeking the appropriate information and still not feel you have what you truly need. And then what about timing to complete the assignment – everyone wants it yesterday and where is the professional societies standing-up for those preparing the reports – USPAP says one needs the time to produce a credible report otherwise you must decline the assignment – good luck you would be out of business in short order. This takes me to the next point.
To me the real estate profession has been behind the technology curve for a number of years and the appraisal profession even worse off. The profession suggest keep hiring people – we do not have enough people to do the work. Yes keep hiring bias when AI and other technology can do the job better with regards to bias and in the long run create a better business model having less workers and all of the trappings that go with personnel – trust me I know having been in ownership positions for over 40-years. Computer are silent workers, at least for now. It appears In the past and today its everyone for themselves when it comes to technology in our industry. Like other industries a consortium moving towards a more cohesive technology based products is necessary. Our industry form a technology standpoint represents Silos of services – show me the money attitude my product is better than yours. And while competition is good. For the end-user it not so good. From my perspective, the professional societies and big tech should be getting together to move towards AI and algorithms and other data driven technology that is more cohesive and less Silo driven. There is much good technology in our industry and improving daily, but did you ever want to use some of this technology – its all over the board and difficult to determine what is best for a particular firm – so what happens – the firm creates their own systems – there should be scalable systems that are not confiscatory so firms do not have to create there own but build on others systems – maybe go to an open-source platform in some instances with licensing. Its about time we start to get creative or someone will create HAL to do our job for us and better.
April 20, 2022 @ 9:04 am
@Joseph Stachow Jr. :
In my opinion, one should write the narrative of the neighborhood before filling in the check boxes on the form. And reference the narrative on the form. Here’s an example: The neighborhood is bounded on the west by Highland Drive. Along that thoroughfare, properties are residential on the east side and are predominantly commercial on the west side.
The north boundary is defined by the Grand Itchy Ridge State Park, in which there are no structures intended or used for continual residential occupancy.
….etc., etc. Your client should be able to answer the “Why” question for any boundary mentioned.
The real problem (again, IMO) seems to be how the clusters are defined within the neighborhood or segment being investigated. If it can be done mathematically (and K-Nearest Neighbors is a recognized means of clustering) then your workload is reduced. But a lot of times, an element of opinion creeps in: This property (not the subject) could fall into cluster A, or it could be in cluster B. Where do we put it? Well, is there any element that commands its inclusion in a particular cluster? No? OK then, your guess is as good as mine. Flip a coin or find some way to disagree intelligently and articulately with that logic.
I keep hoping George will solve this dilemma someday. 🙂
April 20, 2022 @ 11:19 am
I would strongly disagree with eliminating or replacing a description of the area surrounding the subject property. Whether or not it is called a neighborhood or something else, it is important that the reader understand the character and nuances of the location, including land uses, proximity to services and other amenities, trends and transitions, and whatever makes this location unique relative to others. It is also important to the appraiser, because it forces him/her to think about how the subject property relates to its location. It is important enough that the 15th edition of The Appraisal of Real Estate devotes an entire chapter to the topic of Neighborhoods, Districts and Market Areas.
By way of background, I’ve done only litigation work for decades, and have little use for the form reports used for lending purposes, although many residential appraisers do a good job within the limitations of the form by adding appropriate addenda. For those preparing narrative reports that start with the economy of the United States (or California or whatever), it’s time to stop selling your work by the pound. If the national economy is relevant to the property being appraised (suggesting that the CMS is broad enough to include out-of-state comparables), great . . . otherwise, keep the location discussion to what is relevant. But recognize the importance of a succinct well-written location description.
April 20, 2022 @ 11:42 am
My first year of appraising, we would get the old appraisal from the value if they had the loan on it. I was seeing report written back in the ’60’s some time.
Neighborhood comments would either be “Average quality area of average quality homes” or “Good quality of good quality homes”. Then one day I got one written in 1961 that said simply “Evidence of Colored moving into the area”.
It was written by a then trainee, who by the time I came along was a dual designated, chief appraiser, president of the SREA, past r\president of the AIREA.
I even ran into deed restrictions in upscale areas that forbid certain people from buying in the project, San Marino was one of those cities.
Where I spent the most years growing up was in an integrated housing project, red, yellow, black and white; the only common denominator was that we were all poor.
There was no racial bias there. There was bias against Communists, and other religions; just not racial.
Part III: Do We Need a Neighborhood Section? - George Dell, SRA, MAI, ASA, CRE
February 12, 2023 @ 2:16 pm
[…] Part I and Part II of Do We Need a Neighborhood […]
Do We Need a Neighborhood Section? Part II - George Dell, SRA, MAI, ASA, CRE
February 12, 2023 @ 2:16 pm
[…] Do We Need a Neighborhood Section? Part I is here. […]