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I'm a real estate appraiser and I teach appraisal basics in a school in eastern Oklahoma. In my practice, I specialize in reviews, rural and complex residential and small commercial properties.
I have always taught that the neighborhood and market area are two different things. To use an illustration that I use in class, I suggest the new appraiser use the "bicycle test" to establish neighborhood boundaries. This is the area you will let your 10 year old kid ride his bike. I then go on to say that the market area are those neighborhoods that compete with each other and where a typical buyer will purchase, without bias, a house with similar utility. Competitive neighborhoods may be several miles apart, but if a typical buyer shops both of them with equal acceptance, then they are competitive.
I would really appreciate input, definitions, or perspectives on what you consider a neighborhood, and how it is different from a market area. The text book I use considers neighborhood and market area synonymous. A few weeks ago, an appraisal I reviewed listed the Neighborhood as an area about 55 miles E/W by 50 miles N/S......just to make his "comparables" come from the same "neighborhood." It is this type of slop that has contributed to the sub-prime meltdown......and it is this slop that I want to try to stop by incorporating into the classroom solid, easy to remember, definitions, despite what the texts say.
Goodpasture, I think that you are right on in differentiating neighborhood and market area. I think your bike test is a good general rule of thumb to use.
Goodpasture, I think that you are right on in differentiating neighborhood and market area. I think your bike test is a good general rule of thumb to use.
this makes sense to me and the other thing to consider is that when someone is buying a home, they arent just buying a home, they are buying a neighborhood...55 miles is not a neighborhood - goodness!!!!!!!!! If that were the case........I could be living in the projects and that would be considered part of my neighborhood?? I think not...... yikes
I have absolutely no experience with true rural areas.
It seems to me the 55 mile rule might be appropriate in some areas. I am thinking of some Western states, Alaska and major farming areas. The term neighborhood may not be appropriate.
It's a ridiculous parameter in the more common urban/suburban enviornment.
Does it make any or more sense to use the typical lot size /acreage of the subject property as the driver, here?
To me a neighborhood is subdivision or community (for rural areas). Ironwood Estates, Cloud 9, Sunnyridge...neighborhoods. Market area is South Salem where all of these neighborhoods reside. These neighborhoods are truly distinct from each other and only moderately comparable. I would think for the most honest appraisal that you try the immediate neighborhood, and if there aren't enough comps then you go into the market area.
I have seen appraisers not take lower priced comps in the neighborhood, but went for a higher comp in the market area which was not so comparable in order to meet the purchase price.
I think the biggest problem with many appraisals is the appraisers don't often live in the city they are appraising. So they don't know that this school gets better scores so homes tend to sell for more, which is why you can't use it as a comp for a home in the other school district which is a block over.
Personally, I think appraisers should not be allowed to see purchase and sale agreements. I think if we really want to avoid these problems, the appraisal needs to be totally unbiased. Let appraisers go out and look at the data without pressure. If it doesn't meet the price, let the agents take it from there.
I think the biggest problem with many appraisals is the appraisers don't often live in the city they are appraising. So they don't know that this school gets better scores so homes tend to sell for more, which is why you can't use it as a comp for a home in the other school district which is a block over.
Personally, I think appraisers should not be allowed to see purchase and sale agreements. I think if we really want to avoid these problems, the appraisal needs to be totally unbiased. Let appraisers go out and look at the data without pressure. If it doesn't meet the price, let the agents take it from there.
I will aslo add that appraisers rarely have been inside the homes they are using as comps and don't really know why one house sold for substantially more than the next. I am not knocking the profession, just allowing for the limitations as does the appraisal process.
The integrity of the process has to start with the entity ordering the appraisal and that means it's going to cost them and the borrowers more to get a better result.
I will aslo add that appraisers rarely have been inside the homes they are using as comps and don't really know why one house sold for substantially more than the next. I am not knocking the profession, just allowing for the limitations as does the appraisal process.
The integrity of the process has to start with the entity ordering the appraisal and that means it's going to cost them and the borrowers more to get a better result.
I agree. I had an appraiser call me on my listing since he wasn't sure it was "worth it." Thankfully I had been in all of his comps and was able to tell him why it was worth more than them.
There is no perfect system, but it seems local appraisers who don't see the contract would be a good start. At least if they are local and busy, they have an increased chance of having been in a comp.
To me, neighborhood is usually a subdivision, or an area of homes close to the subject home that are very similar in age, lot size, etc. While most appraisers are very ethical, I have seen a couple of appraisals where the comp houses were within the "bicycle rule", but the appraiser jumped over houses that were almost identical to the subject house (tract home on teeny lot) and used other semi-custom homes on large view lots for comps. These homes did meet the "bicycle rule" and were within 1 mile and comparable as far as sq ftg, but that was about it - kind of like comparing apples and oranges. There were plenty of recent sales within the tract home subdivision but the appraiser didn't use those. . . . Obviously not a good appraiser/appraisal, but a lender wouldn't know it unless they were extremely familiar with the area.
Market area I think is very helpful to agents when trying to determine a list price and to establish market value. If an agent (or appraiser) really knows the various areas/neighborhoods and knows that buyers in a specific price range will opt for Neighborhood A or C equally well, and there are no recent sales in Neighborhood A, then you immediately look to Neighborhood C to establish a list price and determine market value.
I really appreciate the knowledgeable appraisers that aren't afraid to go beyond that 1-mile radius if needed in order to find a true comp. I hate to see an appraisal come in with 1 or 2 houses used as comps that are so dissimilar, except for sq ft and location, that there are either lots of adjustments or else a comparison of Plain Vanilla with Spumoni w/Sprinkles.
I just wanted to applaud you for doing this. There is a lot of slop out there that needs to be tidied up. 50 mile range is my neighborhood ? My gated luxury home is in the crack meth lab hood then too.
And please Realtors please, if you are listing a property with a lot of extra upgrades for the subdivision, make sure that a WALK THROUGH appraisal done by the buyers bank is in the contract. A drive by appraisal on such a home can kill the deal for you.
If you are a seller whos home has a lot of extra upgrades, make sure it is in the contract.
If you are selling an outdated dump, don't worry about it. Better your place gets compared by the price per sq footage alone method and you get appraised higher because of the nicer updated, remodeled, added features, homes that sold in your neighborhood.
I don't know whoever it was that thought comparing sq footage alone was a fair appraisal, let alone homes in two radically different sub divisions 10 miles a part.
Since when do laminated counters cost the same as granite, no fence vs fenced yard, new brazllian hard woods vs old green plush, 42" in Maple cabinets vs 30'' particle board?
If this slop isn't corrected, more and more will stop making home improvements because they know it won't be worth it at resale and we will all be living in outdated dumps up the road or we will have to pay cash for the nicer homes because the banks won't appraise them at a value above the comparably sized dumps.
Thanks for making steps to make the corrections you are OP!!!!!! Wish more would follow your lead ASAP.
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