Hi, I’m Diana Jacob. Many of you know me from “ABC” — The Appraiser’s Business Companion,” where I answered questions about appraisal practice. Specifically, I often answered questions about difficult assignments and wrote “The Tip of the Week.” It was with a heavy heart for many of us, including me, when it was decided the service of ABC would no longer be available. Over the past six months, Partin Appraisal Service approached me with a new opportunity in a similar capacity. They understood the value of the Questions and Answers as well as the current topics of the day for Real Property Appraisers. Thinking about the value of that service and wanting it to continue, I said, “YES”.
This is an exciting year for Partin Appraisal Service as they expand their services to include a new website. They now also have a place for commentary newsletter about current events in the Real Property Appraisal profession and a place for Questions and Answers, where appraisers can go and have their specific questions addressed. The information for an interim, will be at no charge. Later, subsequent charges for questions and answers will be made known in the future as a membership benefit to the source and access becomes better defined. Becoming familiar with this opportunity you should know the newsletter is currently planned to be offered bi-monthly on this website. The benefit will be for not only appraisers but also users of appraisal services, i.e. lenders and real estate agents. Gather your thoughts, ask your questions, your inquiries now have a new home. I’ll go first, “How do I identify the boundaries of a neighborhood?
For mortgage lending, since 2005, the residential appraiser has been directed to identify the boundaries of the neighborhood, by its direction, North, South, East and West. The forms just state boundaries but the secondary markets who underwrite the loans are a bit more specific, “The appraiser should provide an outline of the neighborhood boundaries, which should be clearly delineated using “North, “South”, “East”, and “West”. These boundaries may include, but are not limited to streets, legally recognized neighborhood boundaries, waterways, or other natural boundaries that define the separation of one neighborhood from another. Appraisers should not reference a map or other addendum as the only example of the neighborhood boundaries.”
I think a lot about words. Words such as “should”, not must, “The appraiser “should” provide an outline of the neighborhood boundaries…..”, I think are critical when it comes to regulatory compliance. The clear delineation using the direction of north, south, east and west are to define the separation of one neighborhood from another. I get it, but I must ask first, what if it’s a rural market? Secondly, do the users of my appraisal report understand that there are more than houses in that description? Living in more than one rural town in my lifetime, I understand why one town is different from another but the whole area, known as the community or town of is very often considered by the occupant, the neighborhood. How do I define that area by a boundary? How do I communicate factually the boundaries of greatest influence on the marketability?
Location of a market area and a neighborhood are often used interchangeably despite the fact there have distinctly different meanings. Confusion arises because the method of delineation follows the same four basic principles. Physical Boundaries can be man-made or natural whereas intangible boundaries are social as well as political. It’s the market area that formally defines the geographic delineation for a specific category of real estate. You will have boundaries in a neighborhood where the subject property is located but it will in most cases have non-residential properties as well. Its for this reason that land uses are defined in the neighborhood. Its possible that both the neighborhood and market area will have the same boundaries, but in many cases that market area will contain several neighborhoods or portions of different neighborhoods. Market areas are defined by the type of property, its where the competition exist. There will be a homogeneity of properties within the boundaries of a market area. Neighborhoods tend to define the primary market area for most non-complex residential properties attracting similar minded buyers. A market area can include neighborhoods, districts or a combination of both. The delineation of a precise market area boundary can be challenging as there may be an overlap.
Reading Valuation Advisory #4 (published by The Appraisal Foundation under the work completed by the Appraisal Practice Board), the question of differences or same characteristics between market areas and neighborhoods is explained and is advised to be read for complete understanding. Delineating for the purpose of valuation, a market area has two main parts, the analysis of the user of the market area which includes owners, occupants and the competition as opposed to the analysis for the buyer/seller market. The “user” market is the first step in the identification process of the location. It is done before the buy/sell market is determined because it is the user market that sets the basis of the highest and the best use. Once that market has been determined the appraiser can then go to the next step which is to define the parameters of the substituting properties where comparable transactions are identified, i.e. the buy/sell market.
Take the time to explain to your user, how you defined the neighborhood boundary and market area as well as separating out the market trends that defines the interaction of the subject’s competition. When a neighborhood is defined, there should be a clear understanding of how those boundaries were determined and why.
Thank you for investing the time to be a better you as an appraiser and spending time in DJ’s Corner. Don’t forget, the 2020-2021 is the current edition of the Uniform Standards of Professional Appraisal Practice (USPAP), you should be operating. If you’ve not yet obtained your copy, go to The Appraisal Foundation website (www.appraisalfoundation.org ), and download a copy. Until the next time, keep up the good work.