What is the value of a gated neighborhood?

Do homes in a gated neighborhood sell for more?

If you’ve ever wondered about the value of a gated neighborhood you’ll want read to this post to the end because I’m going to share what I found during a recent appraisal assignment. While we’re focused on a gated neighborhood in this discussion, the process we go through to find out #1-if value is added, and then #2-to find out how much value there is, can help us with other features as well.

I’m going to take a look at the Greystone neighborhood in North Shelby county to see if homes in a gated sector of the development sell for more than those outside of the gates. There are three similar areas within the larger Greystone development that offer garden homes, with one of the neighborhoods having a gated entrance.

Let the data do the talking

In a recent appraisal I was doing my normal comparable searches based on physical attributes of the house. Remember that during an appraisal, and for agents when pricing a home, you should not comp to a predetermined value or price but rather based on the physical features of a home such as square footage, bedroom and bath count, style, and so forth. I looked in all areas of the neighborhood to find recent sales of homes similar to the one I was appraising.

It seemed that one area of the neighborhood had homes that were selling for more than the sector I was in. Because my comp search involved looking for homes similar to mine I didn’t think that features or physical attributes of the property were the reason. I made sure that all of the search criteria I mentioned above were similar enough that they were not causing the differences. At first glance it seemed to me that the major reason that they could be selling for more was that they were in a gated sector of the neighborhood since there homes themselves were so similar.

Since appraisers cannot make adjustments based on a gut feelings alone I needed to first determine if homes within the gated sector were actually selling for more, and then calculate exactly how much more it was, so that I could apply an adjustment to the sale from this sector that I was going to use. I wanted to include this sale because of the similarity of the home and also because it sold recently and bracketed the subject’s square footage.

A look at pricing trends

The first thing I decided to do was to look back over time to see how the sales prices of homes within the gated neighborhood compared to those outside of the gates. The graph below shows all the sales in the past 6 years, including homes in the gated sector as well as those that are not.

While there are some sales of each kind that overlap in price there is an obvious difference. Most of the sales in the gated sector are selling for more than those that are not in the gated neighborhood.

I did everything possible when picking search criteria to choose sales that were as similar to my property. It’s likely that a home may sell for more for reasons that you cannot isolate in the search criteria. An example of this may be a home that had extensive upgrades in quality of materials or a home that may have been remodeled, however I think these would be the exception and not the rule.

When looking at the sold price, and the differences between non gated and gated neighborhood, it is possible that homes could be bigger which is causing them to sell for more. To see if this is the case I looked at the average size of homes in both neighborhoods and found that there is only a 40 square foot difference, which is not enough to account for the variations.

To dig a little deeper I decided to look at what the homes sold for per square foot. I normally don’t place a lot of importance on price per square foot alone unless there is good conformity among the properties, which there are in this case. When you have properties of this type, looking at price per square foot can help isolate value price differences between homes with different features. The graph below is similar to the one shown above except that this time we are looking at the price per square foot differences between homes in the gated vs. non gated neighborhood.

Again, as with sold price, there is a definite difference in the price per square foot for what homes within the gated neighborhood sold for compared to those not in a gated neighborhood.

What’s the difference?

From the graph alone it is difficult to tell the exact difference in price per square foot. After looking at the average and median sold price data for homes in both neighborhoods I was able to determine that there was a difference of about $10 per square foot between the two. This supports my initial belief that price is influenced when a home is within a gated neighborhood in the Greystone development. This may not always be the case in every gated neighborhood so it should be studied on a case by case basis.

So the market data shows that there is approximately a $10 per square foot difference between homes in these two different locations. To get the adjustment amount we would take the square footage of the home and multiply by $10. We could generalize this by taking the average size of home in the gated neighborhood, which is about 1,800 square feet. This translates into an adjustment amount of about $18,000.

The bottom line is that if you want to use a gated neighborhood home as a comp to appraise or price a non gated neighborhood home within this area of the Greystone development you would need to make a negative adjustment to its sold price.

Question

Do you have any questions about how I determined if and how much the adjustment amount should be? If you have a question or comment please leave a message below and we’ll keep the conversation going. Thanks for reading.

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