Best Method To Determine Location Adjustment?

[NachoPerito]

In most cases, a group analysis is the preferred method in my market area to establish if a location adjustment is warranted.

http://www.appraisers.org/docs/defa...support-of-a-location-adjustment.pdf?sfvrsn=2

The article assumes the average house is the same size from one neighborhood to the next, same quality, same lot size, etc.... How do we know that is true. I bet you if she took the average building size from one sample to the next it wouldn't be the same. Sometimes I will do a group set, but I will do the Price/SF rather than the Price and I would try to make sure there isn't a trend of building nicer homes in one neighborhood compared with the other.

 

[George Hatch]

The main reason you would need to develop a location adjustment is because you've picked direct comparables that are as similar as possible to the subject except for their location. If we're going to further muddy that discussion up by assuming these other "comps" are also different in other ways you're not going to bridge that gap relying solely on land sales.

 

[Terrel L. Shields]

group analysis

We used to have a name for that ...cluster something, I think. Hmmm. Two identical houses costing same to build...if the difference in land value cannot explain the difference in price, then any additional "value" must be attributed to an intangible, or business enterprise value. Otherwise, the total soft costs and total site/lot value accounts for it. Has to. Cost is a given. A good sales spiel is soon unmasked by resales.

 

[George Hatch]

The contributory value of an improvement includes consideration of intangibles such as accrued depreciation, which is not just limited to physical condition.

As for the "best" way to measure location influences, how are you going to use land sales in SFR assignments where there aren't any relevant land sales? Which in my region is basically most of them.

Even in the assignments were there are land sales in both locations, how are you going to say the much smaller dataset involving a property type you aren't appraising is going to be more indicative of the buyer and seller attitudes for the property type you are appraising when the latter dataset is 10-20 times larger?

I would OBVIOUSLY prefer both when the data for both is there, but 9x out of 10 in an urban or suburban area you're usually going to have only the one dataset to work with.

Not to mention the point that the vacant site that's available to its HBU-as-vacant may have a different potential than a site with an existing home that has some obsolescence, particularly if its an underimprovement for the site as if vacant but is still worth more than the vacant site by itself. Which is common IRL.

 

[Joe Flacco]

I get what you are saying. In my example, the oversupplied market conditions is causing depreciation to the improvement. So I guess it could or does make sense to include that difference in the location adjustment.

The way I would probably do it is just avoid properties from the other neighborhood all together since market conditions are different. If I had to include a sale or two from the other neighborhood, I would probably still adjust based on difference in site values but then reconcile the sales comparison approach towards the adjusted values of the comparables in the same neighborhood since they are currently experiencing different market conditions.

What's going to be interesting in my case is if the site values are going to decline in the area outside of the beltway which would make the difference in site value larger compared to inside of the beltway. It may not since there is also a market for people that want to live in or renovate the old house.

 

[George Hatch]

I'm not saying the depreciation is attributable to the location per se. All I'm saying is that whatever the difference is between the properties in the two locations at the moment, that's your adjustment. The "why" of those adjustments is subordinate to the "how much". You don't really care why one location is better than another beyond noting the preferences of the buyers for that location, which as I've been saying all along are a completely different group of people than are buying vacant lots that may or may not have the exact same location influences.

IMO the most land sales (aka oranges) can show you is what you think the adjustment should be among all fruit buyers; whereas comparing the red apples to the green apples will show you what the adjustment actually is among apple buyers. 'Cause in cases like this the apple buyers ain't buying oranges and the orange buyers ain't buying apples.

 

[Michigander]

I'm actually working on a new construction right now just outside of the beltway and the price difference with the same product inside of the beltway would be greater than the difference in site values. The cause is market conditions for the product being different inside and outside of the beltway.

We have this now in my market. Same builder, same model house, same everything but location. One is selling around $275,000 and the other around $380,000 for identical products. Site value differences are NOT $105,000 and it is the market conditions and the cost of regulations between the areas, among probably some other things, but it is mainly what the market will pay. For example, lots in the $275,000 sub can be bought for $20,000 or so, and in the higher sub, around $60,000 or so. I don't get it. I would prefer the cheaper location all day long, but I am cheap.

 

[J Grant]

A 275k house and a 380k house are not comps for each other. The price difference is so steep that they are 2 different buyer sets and therefore the houses even if same size by same builder are not substitutes for a buyer. The 275k buyer is priced out of a 385k area and a 385k buyer does not want to live in the cheaper area, even though they can well afford to. .

A location adjustment should be fairly easy to find, good suggestions here of various methods. An appraiser who does in the same areas/subdivisions year in year out accumulates a working knowledge of which areas sell for more /less, and which are suitable to pull comps from.

At the end of the day, an area commands for location what the market will pay. A more expensive area has something that buyers value and are willing to pay for ...(whatever that something is).

 

[Michigander]

A 275k house and a 380k house are not comps for each other. The price difference is so steep that they are 2 different buyer sets and therefore the houses even if same size by same builder are not substitutes for a buyer. The 275k buyer is priced out of a 385k area and a 385k buyer does not want to live in the cheaper area, even though they can well afford to. .

A location adjustment should be fairly easy to find, good suggestions here of various methods. An appraiser who does in the same areas/subdivisions year in year out accumulates a working knowledge of which areas sell for more /less, and which are suitable to pull comps from.

At the end of the day, an area commands for location what the market will pay. A more expensive area has something that buyers value and are willing to pay for ...(whatever that something is).

They are two counties away. Just saying they are the same builder and same product, and that cost and land values do not always equate to price in the same way. Over and over and over again I will push grouped data for location adjustments.

 

[Joe Flacco]

They are two counties away. Just saying they are the same builder and same product, and that cost and land values do not always equate to price in the same way. Over and over and over again I will push grouped data for location adjustments.

I know you know what you are doing and i wouldn't question anybody that developed the adjustment with grouped sales. Personally, I think I would rather do paired sales than grouped sales. With paired sales, if everything else is equal (including market conditions), the difference would be site value. I am just surprised that a lot of people are dismissing difference in site value because everything else equal, that's what the location difference is. Sales comparison approach and the cost approach should tell a similar story and I don't know how we can dismiss difference in site values when cost approach is site value + contributory value of improvements.