Area-Regional & Neighborhood Analysis in Property Appraisal

Instructor: Donnie Plunkett

Donnie has been a licensed real estate broker for over 15 years. He earned his MBA at Rice University. He also holds the CCIM designation.

In this lesson, you will learn how to interpret the area-regional and neighborhood analysis section in a property appraisal report. Many factors and considerations determine if the current use of the property is the highest and best available.

Location, Location, Location

Miami metro area
Miami metro

The purpose of an area-regional and neighborhood analysis is to determine the highest and best use available for a property. This is a critical aspect of any property appraisal; you cannot accurately value a property until you make this determination. An area-regional and neighborhood analysis provides both positive and negative information about the property.

What is the Highest and Best Use?

Think about an old 1940s farmhouse on two acres on the corner of a major street, surrounded by big box stores, fast food drive-through restaurants, and other shopping centers. Comparable rural properties might sell for $100,000 or rent for $1,000 per month. You might be able to re-build a similar structure for $200,000 or less. However, these figures are basically meaningless. Why? Because the highest and best use of this land is clearly not a farmhouse to own or rent out. The highest and best use might be a drugstore or a bank that would sell for millions of dollars. You might be able to bulldoze the farmhouse, lease the land to a drug retailer, and have them pay you $10,000 a month for a ground lease.

Likewise, a neighborhood analysis might indicate problems that have a negative impact on the area. Perhaps residential builders were overly exuberant and built homes much further out than the market could ultimately bear. The area might have been rural with few job prospects within reasonable commuting distance, or possibly completely dependent on something like a natural gas field that has since been shuttered. The area may not have adequate schools or may lack a grocery store and other shopping options. Understanding these factors would be extremely important; it would just as important, if not more so, than reviewing information about the structure itself such as square footage and number of bedrooms.

Physical Considerations

One of the first physical considerations to look at includes the location and boundaries of the area. Neighborhoods are typically bound by streets or geographic features such as mountains or a canal. In Phoenix, Arizona, being north of a particular canal determines if you are in Arcadia or Lower Arcadia, with a corresponding difference in price of $300,000 or more. Access and transportation are another consideration; transit-oriented developments located close to public transportation may sell for a large premium. Land use and expected changes in the area's land use are important; if, for instance, homes in the area are being torn down and replaced by trendy zero lot homes and lofts. Hilly terrain might provide amazing views or it might make building on a site too challenging to be profitable. Properties in a coastal area of California might benefit from an ideal Mediterranean-like climate. An infill property in a developed area might benefit from the utilities already being at the lot line.

Social Considerations

Even though social considerations may be more difficult to quantify, they can be just as important as physical considerations. Think about things like having a house with a Beverly Hills address or a retail store located on prestigious Fifth Avenue in New York City. Is the property located in an area that tourists love to visit? Is it located in a school district with great schools? Is there a conformity of development within the area where everything is nice, or is there a hodgepodge of quality and different uses sandwiched together? Is this an area where a lot of people live or want to live, and a place where businesses want to be?

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