How does a location on a busy street impact value? It’s sometimes easy to think a busy street might have only a minimal effect on value of $5,000 to $10,000, but it can actually be quite significant. Let’s take a look at the Arden Manor neighborhood in Sacramento for reference. What do sales on Watt Avenue, a busy 4-lane street, sell for compared to the rest of the neighborhood?
What do you see when looking at sales over the past ten years?
The best way to determine an exact value adjustment for sales on Watt Avenue is to compare similar sales on Watt Avenue to similar sales in other parts of the neighborhood. For instance, if a 1081 sq ft model sold on Watt Avenue, how much did a competitive model sell for on a more standard street without an adverse location? When we find a few data points like that, we can begin to get a sense of a percentage adjustment. However, let’s make some general observations so this doesn’t end up being an exhaustive blog post.
Observations about Value on Watt Avenue:
- Sales on Watt Avenue tend to sell at the bottom of the market unless they are updated.
- Even when properties on Watt Avenue are upgraded, they don’t sell at the top of the market. You might see the one sale in 2005 though that closed at $385,000. I’m not sure how that happened, but I will say this same property actually just sold the day after I made this graph for $155,000 (not at the top of the market).
- If an appraiser or agent adjusted $5,000 for the location difference, do you think that would be enough? Would you only pay $5,000 for the difference? That’s probably not very close, right? For instance, currently there is a renovated listing on Watt Avenue at $169,000, while other competitive sales on standards streets have closed on the lower end at $180,000, but mostly between $200,000 to $212,000. This means a quick conservative adjustment would be closer to $10,000 (6%), but otherwise there are quite a few sales that sold for $30,000+ more (15-20% easily). A reasonable adjustment could only be narrowed down with research, but at face glance $5,000 doesn’t look like it cuts the mustard so to speak.
The houses literally across the street: Arden Park
The interesting thing about Watt Avenue is that the Arden Manor neighborhood on one side of the street has profoundly different values compared to Arden Park that is literally on the other side of the street. For the most part it looks like there is a difference of close to $100-150K, right? Some properties have sold at similar levels of course, and we have to consider the impact of low-ball bank-owned sales and/or aggressively priced short sales in 2010-2012, but otherwise the value difference is striking.
Things to Remember About Location Adjustments:
- The best way to find out how much a busy street (or any adverse location) is worth is to start comparing sales on a busy street with other similar sales on standard streets.
- There is no adjustment that will work for every neighborhood because real estate adjustments are about location, location, and location.
- Location adjustments tend to get larger when a market is soft since buyers have their pick of properties, but when inventory is tight, adjustments might be smaller.
- If there are no recent sales on a busy street for comparison, go back in time to find older sales. What were those sales selling for at the time compared to other properties on streets with less traffic flow? Get a good sample too because having only one pair of sales isn’t enough to establish a solid adjustment.
Questions: How have you seen location impact value? Any further insight, questions, or stories to share?
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Gary Kristensen says
Very well done Ryan and very interesting. I wish all appraisers would take time to look at data so thoroughly and make adjustments based on real data. I would like to also point out my observation from Chart 1. When market times are booming and inventory is very low, buyers are often willing to overlook some externalities like a busy road. It is clear that this busy road is not something that buyers ever completely overlooked. However, I notice that prior to 1/1/06, when prices are increasing quickly there are 4 of 9 (44%) sales that were not at the very bottom of the market with the busy road. When prices were falling between 1/1/06 and 1/1/11, only 2 of 9 (22%) busy road sales did not land at the very bottom of the market. When the market shifts back to lower inventory and increasing prices in 1/1/11, again, only about 50% of the busy road sales land at the very bottom of the market. My point is that the adjustment for this busy road is likely less when the market is increasing than if the market is declining.
Ryan Lundquist says
Thanks Gary. I appreciate your comment. You really analyzed this one. Nice job. You’re definitely right about the perception of buyers in different markets. In markets when inventory is tight, buyers do tend to ignore or pay less for some adverse features. Though in a market that is softening (like today’s market), buyers are feeling more in control of their real estate destiny. This means today’s buyers are passing on homes that have locational or condition issues – unless the price is right of course. The location on Watt Avenue is a really big deal. My observation is houses on Watt are able to sell above the bottom when they are upgraded or have a larger size. Since most homes in this post-WWII subdivision are less than 1100 sq ft, a larger size is an asset. One of the downfalls of the data above is that it would be ideal to also analyze square footage. The point is still clear enough though that location is a driving factor for value.
Gary Kristensen says
For appraisers doing lender work, they should pay attention to your article. Fannie Mae’s new Collateral Underwriter can do all the analysis that you just did in about one second and measure the influence of other factors like condition and lot size.
Ryan Lundquist says
I’m interested to see how it all unfolds, Gary. Fannie certainly has quite a bit of data at their disposal. For any onlookers, appraisals for loans use certain codes nowadays to describe busy streets or give condition or quality ratings. These codes were instituted by Fannie Mae about 3 years ago. You can read more about the codes here: https://sacramentoappraisalblog.com/2014/03/17/a-quick-lexicon-for-understanding-what-the-heck-appraisers-are-saying/. The interesting part now is that Fannie Mae has massive amounts of data, and they can compare what type of value adjustments appraisers are using, if appraisers are using the same comps consistently in each report, etc… These are interesting times.
Jeff Grenz says
Excellent factual post Ryan!
I agree with Gary, when the market is peaking, these poorly located properties temporarily rise in value, but when the market slows they nosedive in value…. and are very slow to sell… an economic impact that is often not priced into a flippers model either (or Zillow for that matter). Properties adjacent to freeways, offramps, busy rail lines and high tension power lines also incur these adjustments.
Many of these “edge” properties hit the distressed property roles multiple times cycle after cycle.
I’ve seen some developers market their edge properties last, when all the best locations are already sold and establishing higher values, then successfully offering the remaining poor locations without much discount if any, emulating the market peak.
Ryan Lundquist says
Thanks so much Jeff. Well said. That’s a great point about some of these properties being in perpetual foreclosure. I just saw one on Watt today that has been an REO two times since 2005. It’s so true about builders selling the worst locations last. Usually builders will sell their model homes last too, which means the models often have the worst locations. On one hand a buyer gets a house stocked full of upgrades, but at the same time it is often on a street backing a busy location or something else that is less than desirable.
Mike Turner says
As usual, a well researched article. I can only add that the value of a locational impact (both positive and negative) also tends to vary, sometimes dramatically, with overall market conditions.
For example if the market is robust and values are rising a ‘busy street’ adjustment would tend to be smaller in both relative and absolute terms. If the market is weak and buyers can be picker that same adjustment would need to be much larger in both relative and absolute terms.
The same can be said for just about any significant amenity. If a pool is worth, say, $10,000 in a down market it might be worth $20,000 (or more) in a quickly rising market.
Ryan Lundquist says
Good stuff, Mike. What? I thought pools were always worth $10,000 no matter what…. 🙂
Thanks for the comment and kind words. I agree about adjustments varying depending on what the market is doing. I wish I would have organized my thoughts differently by moving my point #3 in closing thoughts to point #4 for value observations. This really is more of a value issue rather than a closing thought. Whatever works though. Your comment reminds me yet again that there can be no such thing as a book of values to tell us what adjustments should be.
Cynthia says
Gary
Many appraisers will not work for some of the big banks that have a captive appraisal management company because they have unrealistic due dates/turn times on appraisals that do not allow for the proper research. Allowing the appraiser enough time to do a through job is important for a quality appraisal. You won’t get this type of work for a 24hr turn time. The appraisal is often the last thing ordered in the loan process to “save money” for the borrower in case something else shows up (in other inspections etc.) but that can backfire by not allowing the time needed to do a good job and only appraisers willing to do a lesser job will accept that type of work.
Ryan Lundquist says
Well said, Cynthia. It’s so true. On one hand everyone says, “we want a good appraisal”, but the lending system is not really set up that way in many cases (if requesting a 24-hour turn-time anyway).
Gary Kristensen says
Cynthia, I do not do lender work for the reasons that you stated.
ricardo says
South of Arden, Watt seems to be changing into a Middle Eastern enclave, just as Stockton Blvd did. If this trend continues, I think this will add a lot to Sacramento. Love the falafel.
Ryan Lundquist says
Diversity is a plus. Bring it on.
Tom Horn says
Well thought out post Ryan. It seems like this type of research can be very helpful for pre-listing appraisals as well. If you don’t price your home correctly in this type of market then it could sit on the market for a long time, or not even sell. Getting the price right at the beginning is critical. Can you imagine a homeowner that wants to price their home similar to one that is not on a busy street? If you are able to present this data to them or their listing agent then it helps them to understand where their home should be priced at.
Ryan Lundquist says
Thanks Tom. Well said. You’re so right about pricing correctly. The market in Sacramento has been very much overpriced over the past six months. Inventory is still relatively low, but the market is very price sensitive right now, meaning properties are sitting if they are not priced correctly.