Proper neighborhood and market area identification are vital to the appraisal process because the entire appraisal (including market analysis, highest and best use, and comparable selection) flows directly from neighborhood and market determination. In Portland, Oregon (and everywhere else for that matter), it is easy to confuse subdivisions, neighborhoods, and market areas when talking about real estate. This is because some neighborhoods and subdivisions are also market areas. In addition, sometimes the users of appraisals (for instance, Fannie Mae) can blur neighborhood and market area definitions by the way requirements are written. Perhaps we can help to clear up any confusion by explaining the differences between subdivisions, neighborhoods, and market area.
Subdivision: A subdivision is typically a tract of land that was divided into smaller pieces for individual sale and development. In Portland, the subdivision name is used in the legal description along with a lot and block. This makes it easy to identify the subdivision. Not all tracks of land are necessarily part of a subdivision.
Neighborhood: There are many definitions of neighborhoods in real estate. In general, a neighborhood is typically larger than a subdivision and includes complimentary land uses. A neighborhood usually exhibits a degree of homogeneity in the population and commonly includes a local market or grocery store and other features like parks, schools, and churches that compliment or support the residential properties. A neighborhood likely has more than one subdivision, but it will usually have similar property types, sizes, or income characteristics.
Market Area: A market area is a geographical area where many potential buyers of a particular property might search for a similar property. A market area can be larger or smaller than a neighborhood and, unlike neighborhoods, a market area can change based on the property type. For example, the typical buyers of a $100M mansion might search a much larger area for their desired property than would the buyers of a typical $100K suburban home.
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Residential appraisers in Portland, OR, and everywhere, often encounter properties that include a house with an additional lot that is available to be divided and used for its own purpose. This is referred to as excess land. There are many ways to handle excess land, depending on the client’s need, quantity and quality of comparable data, and intended use of the appraisal.
If the house and the extra lot are sold together as a package, the market typically reflects that “bulk sale” in a reduced price compared to selling individually after division. This is considered by appraisers to be a bulk discount and reflects the market reaction to the cost of officially dividing the properties, difficulties financing properties with excess land, future marketing costs, and investor profit that is expected for the risk of owning both. In other words, the value of the excess land, plus the value of the house, is not the value of the entire property.
If the client wants to know the value of the excess land and house sold together, the appraiser can use the Flat Discount and Bulk Value per Lot Sales Comparable Method. This methodology requires the appraiser to value both the house and the excess land individually (typically using sales comparables (comps) for each), then apply a market discount to the excess land to estimate a total value for the combined property sold in bulk. The appraiser also needs sales comparables of properties that sold with similarly developable excess land (Bulk Comps). Here is an example:
If you find this information interesting or useful, please subscribe to my blog. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, OR area residential real estate appraisal services for any reason, please contact us. We will do everything possible to assist you.