01/31/2023
To my agent friends and family: I was asked by an agent about the affects on value of their property due to an apartment complex being built next to the community. This is what I sent her.
***When we look at factors outside of the subject property that negatively influence value we are talking about “external obsolescence”. Typical examples of external obsolescence include: homes located in close proximity to airports (noise concerns), heavily traveled highways, properties near very loud or foul-smelling businesses, etc. Sometimes external obsolescence can be more subjective (based on the attitudes and/or emotions of the market participant) and attributed to changes in zoning or, in this case, building of an apartment complex near/adjacent to a community.
Let’s assume that the market participants will react negatively to this change. How does an appraiser or agent account for this change? Well, we still use the market to quantify it, typically in the form of the use of the sales comparison approach. We will still use recent sales in the market to determine the indicated value, as of the effective date of the report, to determine what the typical market participant will pay for a reasonable substitute in that market.
What is the good news? If the market does not panic and create a self-fulfilling prophesy of “You will make our property values decrease”, the construction of an apartment community abutting one small section of a community should not create a massive devaluation of the properties. If anything, the properties located immediately adjacent to the new community should be the only ones facing any potential reduction in value as their view changes from woods to a multi-family complex. And, any changes based on that would have to be “proven” by an analysis of sales adjacent to the external factor as compared to sales which took place before the external factor became, well, a factor.
In this market, as median sales prices correct from their high in the summer of 2022, it would be a very skilled agent/appraiser indeed to be able to deduce that a reduction of potential value could be attributed to that one factor- the new apartment complex.***
I'm having fun with this. If you have any appraisal questions that you would like me to address, either privately or publicly, please feel free to contact me at [email protected] or by phone or text to 352-279-2041.
Have a great day!!
