We all know most buyers are going to pay less for a home on a busy street. But how much less? Is it really only something minimal like $5,000 or $10,000, or is it much more substantial? Knowing how to come up with adjustments is critical for anyone working in real estate, so let’s walk through a two-step example below to shed some light on how appraisers might approach a busy location.
The Temptation: It’s easy to use the same adjustments in every neighborhood and in every market, but there is no one-size-fits-all adjustment that will work in every case. This is why we need to know how to research the market.
Here are a couple key points and steps:
1) The best comps don’t need adjustments:
The first thing we want to do is look for sales and listings on the same street. When we have similar sales with roughly the same location, these properties tell us exactly what the market is willing to pay. There is no guessing and no need to use many other sales because we essentially have the best examples of properties that have already been vetted by the market. If we pull sales or listings from a superior street, it’s easy to minimize the adverse location. But if all the sales on the busy street are coming in substantially lower than surrounding sales, the market has spoken. If you don’t have recent sales, you can look at much older sales on the same street, and study other nearby sales at the time to see how much of a value impact there was. If there are zero sales on the subject street, find a competitive busy street in the market area (or maybe even a commercial location or something quasi-similar). There has to be something out there. Also be sure to look at actives, pendings, expired listings and withdrawn listings since they can sometimes give clues on value.
2) Comparing busy vs. not busy:
This is where we take a good look at any potential price difference between sales and listings on busy and not busy streets. We have to make sure we are comparing “apples to apples” so to speak, so pay close attention to size, condition, upgrades, lot size, layout, garage space, etc… The goal is to match up several sales instead of just one example because this helps us have a better context of support. In truth we might end up coming up with a range of value for what we think the adjustment should be too. That’s okay. Just ask yourself where your property realistically fits on the range of value spectrum.
The Verdict: There haven’t been many recent sales in the immediate area lately, which makes it a more involved process to establish value. But even with these older sales, the value difference is fairly large, right? When looking at sales on Freeport Blvd vs competitive sales on typical streets, it looks like the value range is easily anywhere from 25-50K+. If we spent more time on this, we could hone in on a tighter range, but you get the point, right?
NOTE: I am not saying this is the adjustment to give. This is simply a quick snapshot of the market right now for the sake of illustrating a methodology. Remember that these properties on Freeport Blvd also back to public transportation too.
I hope this was helpful. I’d love to hear your take in the comments below.
Questions: Any further insight or stories to share? How have you seen an adverse location impact the value of a property?
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Great blog post and this adds to one of my favorite Ryan Lundquist posts. I really like the blog you did a while back on busy roads where you scatter charted all of the sales and highlighted the ones on busy roads. I often quote or reference that article.
That’s so cool. Thanks so much Gary. That was definitely a telling visual from that post. I think this time around I wanted to take it a different route by showing how we begin to get an adjustment.
The best defense is a good offense.
When inspecting a house on a busy street I prep the homeowner by asking them two simple questions. 1) Do you think you got a good deal when you bought the house? (to which they almost always answer yes). 2) Why do you think that was?
It’s relatively easy to then mildly suggest that perhaps part of the ‘good deal’ was related to the location. It’s far less of a surprise when they get the actual report as they will oftentimes recall the conversation.
Nice, Mike. I love it. That’s a good question to ask. I bet you get some insightful responses too. I always like to ask why the owner bought in the neighborhood as well as “Where else were you looking when you bought the home”? It’s always interesting to hear other places an owner was willing to live.
Wonder how much of a premium, if any, exists for homes on cul-de-sacs?
That’s a great question, Jim. We often hear things like, “A corner lot or a cul-de-sac is a premium”, but the only way to know is to compare sales with and without that location dynamic. I find it would probably depend on the cul-de-sac too. Are we talking about one that backs a main street? Or is this a cul-de-sac where there are 20 cars parked on the tiny street? In that case, it may turn off buyers, right?
Great description of the methodology that can be used to come up with an adjustment Ryan. I find speaking with agents to find out what buyer reactions are is a good way to get a feel for the markets reaction. A property in this type of location is not a good candidate for a Zestimate value so the value of a live appraiser coming up with a value is priceless.
Thanks Tom. Yes, insight from agents can be very valuable here too. You’re so right about the Zestimate. It would be very easy to be off-base about the value of these houses if you didn’t take into account the busy street and backing to public transportation.
Great explanation Ryan! I agree with Tom – speaking with agents that have marketed comparable properties on a busy street is always helpful.
It probably goes without saying, but the same process can be used to analyze nearly all types of detrimental conditions (homes near railways, transmission lines, industrial uses, etc.)
Thanks Paul. I appreciate your take. Yes, you are right about that. It always comes down to making proper comparisons and finding the right context. When someone asks how much a certain something is worth in a market, the answer is very often, “It depends. What does the market say?” Thanks again.
It’s interesting how appraisers evaluate the value of a home based on the number of recent transactions in the area. I’ve also thought that older sales would make the value difference fairly large. I’m glad that you cleared that up. It seems like looking at sales in an area compared to competitive sales on other streets that are similar to the area a home is in would help to make the value range much easier to find.
Thanks Steve. It’s good to hear your take. Sorry for the slight delay in response as I was out of town. The more data we have, the more there is to consider.