I had a real estate agent ask a fantastic question recently about choosing comps when there is a gated neighborhood. Here’s the issue: If the subject property is NOT located in a gated community, can an appraiser use “comps” that are similar and within 0.25 miles but are in a gated community? My answer is YES and NO.
YES: An appraiser can definitely use sales from a gated community. If there isn’t a price difference inside and outside the gate, an appraiser can use gated sales and make no value adjustment. Or if there is a price difference between the two locations, an appraiser can always choose to use gated “comps”, but also make an up or down adjustment to account for the value difference.
NO: Sound the alarm because it’s a red flag if you are valuing something outside a gate but only using gated “comps”. After all, what is the gate keeping in? And what is it keeping out? Despite being nearby, a gated subdivision could be a much different market that is higher or lower in price. Realistically, if I am only using gated sales for my “comps”, I haven’t really shown what the market is willing to pay outside the gate. There could be a value difference, which is why it’s critical to find non-gated sales to help tell the story of value for the subject property (even if the sales are older). It goes back to an “apples to apples’ comparison where we want to try to use the most similar sales in terms of size, location, condition, quality, bed/bath count, etc… Ultimately as we study the market we can make the distinction between properties that are truly “comps” from ones that are merely sales.
A local example: Here is a graph of all 2500 to 3500 sq ft sales in the Crocker Ranch area of Roseville. The blue dots are the gated sales and the yellow dots are the non-gated sales.
The graph helps show larger-sized properties inside the gated areas tend to command higher prices. Obviously there are some higher non-gated sales too, but the highest sales in the area over the past 7 years have come from within the gate. This is why we have to study sales and then choose “comps” accordingly.
Questions: Do you find values to be higher or lower outside of a gated community? Any other advice or wisdom you’d offer when it comes to choosing comps? Did I miss anything?
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Ryan,
What does your chart look like on a psf basis? That could be very significant.
I haven’t run it that way. That could indeed be very telling. Thanks Joe.
I love the chart Ryan and it is a lesson in the importance of bracketing. We don’t have too many gated communities in our area, unless they are very high-end custom homes over $1M on small acreage (we have exceptions though). In our area, on the expensive properties, the bump from the gated community might exist, but it is much more difficult to recognize in the paired sales or statistics. This is particularly true because the comparable homes might not be in a gated community, but many will have their own private gate. In one gated community I was appraising, I could not see any difference in price, but I noticed that the HOA dues were higher as a result of the gate. I think that the owners in this gated community paid for their gate monthly rather than in the higher purchase price. One owner told me that the gate was expensive on the HOA due to cars that keep damaging the gate, insurance, permits, upkeep, etc… Love the conversation.
Thanks Gary. I really appreciate you always pitching in to make conversation more interesting. That has to be frustrating for locals to pay higher fees because of ongoing damage. I wonder if they could install security cameras to catch who is doing the damage.
It seems like there is this idea that a gated community is always worth more, though that’s not necessarily true. I guess it comes down to location still and what the gate really represents too. What is it keeping in and what is it keeping out? Sometimes a gate is really just an illusion for the outside too. I know one neighborhood locally that has a large entry gate to the neighborhood with what looks like a guarded entry, but the gate literally doesn’t even shut and there is no guard on duty either. It’s just for show to make people think there is a security gate and guard. There are other gates that are technically closed, but then passersby can simply walk through one of many access points. This reminds us that gates aren’t the end-all security system. Though to be fair there are a couple local gated communities that have what seems to be really stellar security with a strict check-in process for guests too. I would guess it’s more difficult to commit crime there. Though at the same time the HOA fees aren’t cheap either.
Great post Ryan. My post on gated neighborhoods is coming out today. I also found there to be price differences between the two, with the gated sales being higher. I think the important thing to remember for appraisers and agents alike is that you can’t use higher priced sales just to support a higher value unless you take everything into consideration. You need to determine why those higher priced homes are selling for more and make adjustments if necessary.
Thanks Tom. I can’t wait to read what you wrote when the email subscription comes to my inbox. In the mean time if anyone wants to check out Tom’s post, see here: http://birminghamappraisalblog.com/faqs/what-is-the-value-of-a-gated-neighborhood/
Well said on using higher sales. I completely agree. It’s easy in real estate to “cherry pick” higher sales, but we have to crunch the numbers correctly and be realistic.