The Importance of Location in Home Pricing
As real estate professionals, we all know the saying: “Location, location, location.” It’s one of the most important factors when evaluating a property’s value, yet it’s often misunderstood or overlooked during the Comparative Market Analysis (CMA) process. I thought I would take time today to explain why real estate agents should consider location differences when pricing a listing. This blog post will cover the various aspects of location and its impact on a home’s value, providing useful tips for agents to avoid costly pricing mistakes.
Why Location Matters
In real estate appraisal, location isn’t just about the neighborhood’s popularity or whether it’s near trendy shops. Location factors can significantly impact market value due to various economic, social, and environmental variables. As an agent, you will need to recognize and factor in these variables when pricing a home because they play an enormous role in determining how quickly and at what price a property will sell when listed.
Location influences:
Desirability: Certain areas attract more buyers due to schools, shopping, parks, or proximity to work centers.
Market Stability: Different neighborhoods might respond differently to market fluctuations, leading to price volatility in some areas and stability in others.
Amenities: Local amenities such as public transportation, parks or recreation areas, and local dining can potentially have an impact on home values.
Safety and Crime Rates: Buyers are often willing to pay more for homes in safe neighborhoods.
Zoning and Development: Future zoning changes, commercial development, or infrastructure projects can either boost or hinder property values.
School Districts: In many cases, homes in higher-rated districts command higher prices and generate more buyer interest.
Natural Features: Proximity to water, hills, or scenic views can raise a property’s value, while noise from a highway or airport might decrease it.
When I appraise homes, location is one of the first things I consider, and the same should go for agents conducting a CMA. Not all homes in the same zip code or even the same neighborhood are created equal, and overlooking a property’s location could cost your clients thousands.
The Danger of Ignoring Location Differences in a CMA
A common mistake agents make when pricing a listing is relying too heavily on comps from nearby neighborhoods or homes with vastly different locational features. Let’s explore why this is a problem.
Imagine you’re pricing a home in a quiet residential neighborhood. You find a couple of comps nearby with similar square footage and updates, but the comps are located next to a busy commercial area or in a flood zone. Using these comps without adjusting for the location difference can result in either overpricing or underpricing the listing.
Overpricing leads to homes sitting on the market longer, causing frustration for the seller and reducing the home’s marketability over time. Underpricing, on the other hand, means leaving money on the table and disappointing clients who expect top dollar.
Throughout my career as an appraiser, I’ve seen how the wrong comps can misrepresent the true value of a home. Appraisals often come in lower than expected because the initial listing price was influenced by comps that didn’t account for significant locational differences. This can jeopardize the transaction, especially when financing is involved.
Key Factors Agents Should Consider Regarding Location
So how can you avoid these potential problems? Here are some actionable steps agents can take to ensure they’re properly factoring in location when conducting a CMA:
1. Neighborhood Boundaries Matter
Understanding the subtle and not-so-subtle boundaries between neighborhoods is crucial. Even if two properties are only a few blocks apart, their marketability can be vastly different. Get familiar with what defines the most desirable parts of the neighborhood and which parts might be less attractive to buyers.
Actionable Tip: Study the market data for hyperlocal neighborhoods. Don’t just lump homes together because they fall under the same ZIP code or general area.
2. Proximity to Negative Influences
When pricing a home, consider its proximity to negative influences like highways, railroads, industrial areas, or even commercial zones. These locational aspects can detract from a home’s appeal and ultimately lower its market value.
Actionable Tip: Avoid using comps located near negative influences unless the subject property also shares those locational characteristics. If it doesn’t, adjust your comp selection or adjust for locational differences accordingly.
3. Evaluate School District Differences
Homes located in higher-rated school districts tend to command higher prices than those located in lower-rated districts. In some cases, the difference can be significant, even if the homes are geographically close. If your comp is in a different school district, be sure to adjust accordingly. In Birmingham, there are some areas that have homes that may be one block away from each other but they are in totally different school systems and it would not be appropriate to use them as comps.
Actionable Tip: Use the school system as a primary search characteristic to refine your comp search. I start with the elementary school system and if I don’t have enough sales I then use middle or intermediate school. If there are still not enough sales I then search using the high school.
4. Gentrification and Development
Some areas are undergoing rapid gentrification, with new businesses, infrastructure, and amenities raising property values. Others may face future development that could affect values positively or negatively. Understanding where a neighborhood stands in its life cycle is important when selecting comps.
Actionable Tip: Study local planning and development maps. Learn about upcoming projects and infrastructure plans that could impact home values in the future.
5. Natural Features and Topography
Homes with scenic views, waterfront access, or even higher elevations often come at a premium. Meanwhile, properties in flood zones, low-lying areas, or near loud, unattractive features may see their value reduced.
Actionable Tip: Pay attention to topographical differences and natural features when evaluating comps. Don’t forget to account for potential flood zones or natural hazards.
6. Market Conditions Within Sub-Markets
Even within a small geographical area, different sub-markets can have vastly different buyer demand. Some pockets of a city or neighborhood may see higher competition, driving prices up, while others may be lagging. An example of this in the Birmingham area is the city of Homewood. Within Homewood, there are sub-markets such as the Hollywood area that typically demand higher prices than other areas of the city.
Actionable Tip: Study local absorption rates and days on the market in the subject property’s specific sub-market rather than applying generalized market trends.
Practical Steps for Agents to Use Location Correctly in a CMA
Now that you know what to look for, let’s outline some specific steps you can take to account for location differences when performing a CMA:
- Pull Comps from Similar Micro-Locations: Start by identifying recent sales in the immediate vicinity of your listing. If you can’t find comps in the same neighborhood or with the same locational attributes, expand your search while making location adjustments as necessary.
- Adjust for Location Differences: When you have to use comps from a different location, make adjustments for features such as proximity to highways, schools, commercial areas, or any locational influences that differ. Appraisers use dollar adjustments (quantitative), however, agents may not be trained to do this so analyzing the sales using a qualitative approach is acceptable. I wrote about this in a prior blog post that you can read HERE.
- Consult an Appraiser When in Doubt: If you’re struggling to find appropriate comps or aren’t sure how to adjust for locational factors, consult an appraiser. As appraisers, we specialize in analyzing locational factors and can provide insight that will prevent costly pricing errors.
- Ask Local Experts: Work with colleagues and industry contacts who have knowledge of the neighborhoods you’re working in. Local insight can often reveal location factors you might miss through data alone.
- Utilize Online Mapping Tools: Tools like Google Maps, GIS maps, or county assessor data can help you identify boundaries, negative influences, and geographic differences. Use these tools to help identify characteristics that may influence value.
Conclusion
Location is one of the most important factors affecting a home’s value, however, it’s often not factored into the CMA process. As an agent, you can help prevent your clients from making costly pricing mistakes by taking a careful approach to location. By understanding neighborhood boundaries, accounting for proximity to amenities (or negative influences), and factoring in the school district, you’ll be able to price listings more accurately.
Remember, location isn’t just about what’s near a home, it’s about understanding the desirability, stability, and market dynamics at play. When in doubt, consult a local expert or appraiser to help guide you through these locational factors. Your attention to these details will not only benefit your clients but will also solidify your reputation as a knowledgeable and reliable real estate agent.
By following these tips, you’ll not only price your listings more accurately but also gain a competitive edge in the market by demonstrating an in-depth understanding of the important role location plays in real estate. If you have any questions feel free to contact me and as always, thanks for reading.
Thanks Tom. This is why it’s so important to understand the neighborhood. The boundaries we choose are a big deal. What is happening inside? And what is happening outside? Viable questions to really understand.
Thanks, Ryan. It is definitely something I see when appraising properties than are under contract for sale. In some situations, the location is not taken into consideration and it has a big impact on what the property appraises for. Unfortunately the value is sometimes less than contract because it was not priced accurately. I hope this sheds some light on things to be aware of when pricing a listing.