It’s one of the oldest sayings in the industry and you’ve all heard it a million times before. “What are the three biggest rules of real estate? Location, location, location.” The thing you have to realize, however, is that it’s not just a tired old axiom! There’s also a valuable truth in there, which is – sometimes even – overlooked too often by real estate appraisers.
Because of my own unusual location, I appraise houses in three different states and multiple counties. Pretty often, I’ll do houses in two states within a single day and I can’t tell you how many times the following has happened. I’ll appraise one home in Idaho in the morning; a 1,200sq ft, 20 year old house, for example. In the afternoon, I’ll find myself in lovely Jackson Hole, Wyoming, appraising – let’s say – a 1,100sq ft house that’s 15 years old.
It’s no exaggeration to say that the difference in the respective value of those houses can be eight, sometimes ten times, in favor of the one in Jackson Hole. The houses will be almost identical, but folks are willing to pay ten times as much money for one… simply because of the dirt that’s underneath it!
Even if we don’t agree with this tendency, or just find it a little strange, we simply must understand it. We can’t afford to underestimate the importance that location plays in evaluating a house. The Jackson Hole example I gave was at the more extreme end of the spectrum, but sometimes you can literally appraise one home, drive across a river or a train track, appraise another home and end up with a 20% difference in value. Everything else about the properties – size, age, condition, amenities and so on – can be extremely similar.
What creates these disparities in value? It can be a physical feature, like a view, or a property being water-fronted. Other times, it’s much harder to put your finger on the differences. Some subdivisions are just perceived as being “more prestigious” than others – for whatever reason – and people will pay a heck of a lot more money to live there. Sometimes, to be quite frank, I don’t have a clue why two extremely similar houses, in relative proximity to each other, have wildly different values. Honestly, I don’t need to know! I just need to understand that there is a difference and appraise accordingly.
Let’s talk now about highest and best use, because it really does go hand in hand with location. Both are all about determining how we arrive at a value, after all.
Probably 90% of the time, highest and best use is obvious to any real estate appraiser worth their salt. Let’s say you’re in a subdivision and you’re surrounded by tract homes. The subject… is a tract home. It’s pretty easy to determine the highest and best use!
Regardless, we can’t fall into the trap of just switching on auto-pilot and going about our business. As appraisers, this is the most important thing we look at, after all. Location plays into highest and best use in a huge way and relates to all four of the tests.
- Is the use legally permissible? Maybe the property can be used as a duplex, but is it legal to do so?
- Is it physically possible? Heck, based on its location, the best usage for some land might be as an amusement park; it doesn’t mean it’s possible to actually put one there!
- Is it financially feasible? Maybe the setting does lend itself to a fourplex – maybe there are fourplexes nearby – but is it financially viable to convert this particular property to a fourplex?
- Are you getting the most value? This is inextricably tied to the other three tests, of course. You might be appraising a property near a university, for example, where the most productive thing to do with a property would be to turn it into a duplex. You still need to know, however, whether this is financially and legally viable.
Let me finish off with a final example. When my wife and I went to Hawaii for our anniversary and – as I tend to do whenever I travel – I found myself checking out the local property listings. I peeked in through the windows of the real estate offices and browsed the free magazines with the property listings. What can I say – I’m an appraiser to the core! That’s how I get my kicks on vacation!
What struck me was the enormous emphasis that the adverts put on the land, rather than the house. They’d go on and on about the views, the acreage, the proximity to the ocean, the trees and so on… oh and then they’d mention a 2,500sq ft home that comes with the land too! Talk about putting a premium on the location!
I urge you, my fellow appraisers, to remember that just because one home is located in proximity to another, it does not mean that their values will be the same. This is especially important to realize when it comes to comparables. There’s a reason, after all, why our clients will often ask us why we went over natural boundaries – railroads, rivers and so on – for our comps. What they’re really asking is, “Are you sure that second neighborhood – that’s only 1.5 miles away from the first – is similar enough that you didn’t need an adjustment?” Why do they ask that question? Location, location, location.
For more information on this subject, please listen to The Appraiser Coach Podcast Episode:
