Friday, 20 May 2022 | The Latest Buzz for the Appraisal Industry

Do We Need a Neighborhood Section?

This article was originally posted on Georgedell.com

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.

© copyrights reserved, to prevent conceptual misuse. George Dell and Valuemetrics.info. See georgedell.com for explanation.

Responses

  1. Seems like a bunch of nonsense. We seriously need to stop using the term red-lining and appraisals in the same sentence. No correlation whatsoever. Red-lining is all but extinct as well. You think for one second that a loan officer in Arizona cares about the neighborhood a particular buyer in Florida is interested in moving into? Just stop the nonsense

  2. I think you bring up some interesting points, and would like to propose this line of thought. We do absolutely need to perform a thorough market analysis for every appraisal but I believe that the word “neighborhood” is no longer relevant. Instead, we should be defining, delineating, and analyzing the market area, which in some cases of highly densely populated areas could also be described as a “neighborhood” but for most of the appraisers in the USA, market area is a better description for the geographical and economic location of the subject.
    Market delineation is defined as “the process of identifying the market area associated with the subject property.” In delineation, we find that a market is defined by the actions of buyers and sellers. In some areas, and for some properties, this could encompass an area many miles in diameter. The market area is determined by the potential purchasers, not by the properties. Location is not the only potential criterion; for example, a specific market could be all properties within a reasonable driving distance to employment or shopping centers.
    In years past, I provided appraisal services in Washington, DC where because of dense population and the actions of people in the market, neighborhoods we well defined and understood as late as the 1980’s. Since then, the old “understood boundaries” and “identifiable neighborhood areas” are blurred to the point of non-existence, or have been combined, changed or expanded by the current market participants, real estate agents, city planners, etc.
    Where I live now, the market area is better understood as a region, where the common link is the school system serving two boroughs and two townships for most residential property decisions. The agricultural properties are considered and compared on a county wide basis, and commercial or apartment properties are compared on a region encompassing two and sometimes three or four counties. Neighborhood does not adequately describe these market areas. Market area does.

  3. Yes we do. Neighborhood identification and analysis is a fundamental building block in the development of a credible opinion of value. Understanding the value influencing factors of a neighborhood is imperative. That’s not to say there isn’t a need to also understand the neighborhoods relationship to a larger area. Think of it as micro and macro views. Both are meaningful however let’s not cancel a micro view because the word “neighborhood” is being implied to have a negative connotation.

    That’s not to say some neighborhoods in communities of color aren’t still experiencing the legacy affects of the scourge of redlining. Those problems need to be addressed. But not using the word neighborhood doesn’t fix any of it.

    All too many years ago I learned how to appraise in Washington, DC. It is important to note not all neighborhoods are equal even in communities of color. There can be multiple legitimate factors as to why buyers choose one neighborhood over another even when the housing stock is similar. So let’s not put the word “neighborhood” on some Do Not Use list.

    RTM

  4. The article has two statements which caught my attention: “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.” And the second is “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. ”

    I use statistical techniques to help me estimate the market value of a subject property. Big data does make the “cookie cutter” property appraisal easier and more defensible to perform. But my market has very few neighborhoods where statistics alone might produce a credible value.

    Nevertheless interested I followed the author’s links and read four articles which has the same level of writing as in the Appraisal Buzz copy. While I don’t think the articles are”nonsense” as described below, my reading led to an advertisement for the author’s $199.00/year newsletter which ostensibly would train a modern appraiser to utilize EBV to replace the “opinion” based market delineation appraiser’s have used since I took my first appraisal class in 1980. As I recall back then an appraisal was a simple “opinion based on facts” and appraisers were cautioned against giving a too precise value estimate which implied a greater degree of accuracy than warranted.

    So what I am gleaning from the article is the appraiser of the future will spend less time actually driving the “neighborhood” looking for the social, economic, environmental and governmental forces affecting market value, but instead from the office evaluating the accuracy, credibility and reliability of the person who created the algorithms underlying the EBV to give a precise market area definition and consequently a more accurate value estimate.

    Sound like a utopian vision of the appraisal profession to you? How about when an appraiser is before a state board defending a value opinion when the complainant against you put evidence into the record with a EBV and/or AVM that claims its data is market derived, reproducible and proven by data science?

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