Friday, February 08, 2013

What’s in a View?

I was recently interviewed by a reporter for the Wall Street Journal on how an appraiser values a residential property’s view.  Unfortunately, my interview did not lead to an actual quote in the article, but the topic got me thinking… what’s in a view?

The “view” is typically what can be seen from the subject property.  Sometimes an appraiser may consider the View to be more than what you can see, but also hear and smell.  The value of the view is in the eyes of the beholder.  Some place more value on it than others.  The appraiser tries to estimate the impact of a view as perceived by market participants.  The value of the view is not something we pull out of thin air, it is something that is generally based on years and years of appraising hundreds or thousands of homes.

One starting point to measure the value of a view may be in a new construction housing development.  In a new development, a developer/builder will establish a site premium for a view on the lots.  For example, in a Naperville golf course community, the developer originally gave a $50,000 premium for homes on the golf course over homes that backed up to other homes.  For years, that was a good general guideline in that neighborhood on what the value of that golf course view was worth.  Sometimes the resale market accepts that premium, rejects it, or places a greater premium on that view.  And it is important to realize that $50,000 golf view adjustment does not automatically translate into other golf course neighborhoods.

The value of the view may change over the years.  To some, that view of the golf course may be perceived as a positive view – the picturesque view with no neighbors to the rear, with perfectly manicured fairways, bunkers and maturing trees, with a passing golfer or two ever 10 minutes on a nice day.  But to others, that view could be a constant barrage of golf balls flying into your back yard where your kids are playing, occasionally even hitting your house and once or twice a summer, breaking one of your windows.  There are strangers constantly walking or riding golf carts behind you, often times cussing at their errant shots.  Depending on where on the golf course that home is situated, may influence the impact of the view.  The beauty is in the eyes of the beholder.

In the world of real estate appraisers, the view is generally called External Influences – things that affect a property that is not on the actual property itself.  If it is negative, it is called External Obsolescence which is a reduction in value caused by an undesirable factor(s) outside of the property itself.

In 2011, Fannie Mae defined the description of “View” into a few items through its implementation of the UAD – Universal Appraisal Dataset.  It defines the fields that an appraiser must enter for report submission for conventional loans.  There are three basic categories for View on an appraisal report – Neutral, Beneficial or Adverse. 

Neutral – If the view is neutral, it is generally assumed that similar housing and/or land use surrounding the property is the same.  A neutral view would be a “residential view” of like-properties in each direction – to the front, rear or sides of the subject property.

Beneficial - Parks, forest preserve, wooded, golf course, pond, lake, ocean, hillside or mountain

BUT… To some, that park may have screaming children and families on Saturday mornings playing soccer at 8 AM.

BUT… to some, that forest preserve may have creatures that may prohibit the enjoyment of the family – such as wildlife that may pose a threat to children or pets.

BUT… To some, that golf course view may be that constant barrage of golf balls flying into your yard while your kids are playing – as previously mentioned.

BUT… To some, that view of the pond may pose safety issues for those with small children or pets, and health issues such as alligators or crocodiles in Florida, or the West Nile Virus in our region caused by mosquitoes.

How much do we give that Mountain, Lake or Ocean view?  Being from Chicago, I don’t have the experience of the ocean or mountain views, but we have Lake Michigan.  High rise condominiums in the City of Chicago may have a $100,000 to $250,000+ view premium viewing a clear view of the picturesque cityscape AND Lake Michigan, versus a view in the opposite direction.  But what happens when that new condominium high rise building goes up on the next block that completely obstructs your serene views?  Gone in a flash!  With the popularity of residential condominium development in Chicago in the past 10-15 years, this has happened to many buildings.

Adverse – Many examples can be thought of, naming a few: Commercial/Retail use, House of Worship, parking lots, Industrial use, busy streets, railroad tracks, high tension wires, water towers, garbage dumps/landfills.

But let’s be careful, again, the view is in the eyes of the beholder.

Busy street in urban/city areas perhaps with higher crime rates, there may be a sense of safety with higher traffic versus quiet street.

I have done a lot of relocation appraisals for transferring homeowners who work for the railroad – they actually like to have the railroad tracks within view.

Not sure?  Some views could be both positive to some, Negative to others.  Some examples include busy streets, schools, and cemeteries.

Cemeteries are going to be nice quiet space to some market participants, while others are turned off.

A view of a school could be negative if the building/parking lot are closer to you that may create adverse appeal if it is constant cars and buses lining up. But to some, that view of the school may be a positive if there is a park-like buffer between the school building. Also, the type of school and the family profile of the buyer will impact that proximity to the school – being able to watch your first grader walk out your door to the school’s front door is very comforting to a parent.

So, we have an idea what beneficial, adverse and neutral factors are.  Now how does the appraiser measure the impact? The appraiser attempts to measure that view in terms of dollars that one is willing to pay or deduct.

In a perfect world, matched pairs can be identified.  This means two identical properties are found to have both recently sold, with the only differentiating factor is that one has a different view influence (positive or negative) and the other has a neutral view influence. In the real world, this rarely every happens, but the theory behind this simple example is what provides the basics as to how an appraiser applies all of his or her adjustments in an appraisal.  Most often, this analysis is a judgment call based on years of analysis of the professional appraiser.

Also, the magnitude of the adjustment may change as the real estate market changes… for example, if a home was worth $600,000 five years ago, and the view was a 5% premium, it would be $30,000.  The same house declines $200,000 in the real estate market five years later, and that view premium still may be looked at as a 5% premium, so it is now $20,000.   This is one way that views can change with the market.

Another way the value of the view may fluctuate may simply be timing.  The laws of Supply and Demand may influence the magnitude of the adjustment – if there are many homes competing with one another with the same view, that can minimize the impact of the view; conversely, if the view is so unique and not typically available, one may be willing to pay a higher value for that view.  How much?  That is in the eyes of the beholder!


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