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What is a Neighborhood?

 

There are references to the term “neighborhood” throughout the 1004 form.  The appraiser is asked to report: the neighborhood name, the neighborhood boundaries, the number of comparable sales in the neighborhood in the past year, etc.  Therefore, it is critical for an appraiser to understand the term neighborhood.

The Dictionary of Real Estate Appraisal, Fifth Edition, provides the following widely-accepted definition of neighborhood:

A group of complementary land uses; a congruous grouping of inhabitants, buildings, or business enterprises.

Note that this definition refers to land uses (plural).  An area comprised solely of residential housing units would not be a neighborhood, because such an area would not include multiple land uses.

While it is quite common for appraisers to define a neighborhood based on subdivision boundaries, or distance parameters (e.g. one mile), such approaches are not consistent with the actual definition.

When identifying a neighborhood, the appraiser should consider other properties that complement the subject property.  Think about people who would live in the subject property.  Where would they buy groceries?  Where would they bank? Where would they buy fuel?  As such questions are considered, the appraiser begins to identify the neighborhood and the boundaries that should be reported in the NEIGHBORHOOD section of the URAR.

 

The geographic area encompassed by a neighborhood can vary greatly in size. Neighborhoods in rural locations are typically larger than neighborhoods in suburban or urban locations. This is why distance alone is not a valid parameter for identifying a neighborhood.

 

Common Issue

Reported Neighborhood Boundaries Are Too Narrow or Too Wide

As noted earlier, some appraisers identify neighborhood boundaries based simply on subdivision boundaries or arbitrary distance parameters (i.e. within one mile of the subject property), rather than considering complementary land uses. Many neighborhoods are comprised of more than one subdivision, and many subdivisions are larger than a one mile radius. Defining neighborhood boundaries too narrowly can result in an appraiser omitting key data.

The neighborhood boundaries should not be artificially expanded just to increase the number of sales and/or listings that are reported to be “in the neighborhood.” If a neighborhood has very limited market activity, then that should be communicated accurately in the appraisal report. However, if data is very limited, then an appraiser should consider whether that is truly the result of limited activity, or if it is due to defining the neighborhood too narrowly.

Using Different Neighborhood Boundaries in Different Sections of the Report

The neighborhood boundaries presented in the NEIGHBORHOOD section should be used consistently throughout the report. For example, when responding to the questions at the top of page two of the URAR regarding the number of comparable sales and listings in the neighborhood, the results should correspond to the neighborhood area defined on page one. Likewise, the data presented in the grid on the 1004MC should reflect sales and listings of comparable properties that are located within the neighborhood boundaries reported on page one. Failure to consistently use the same neighborhood boundaries throughout the report can result in conflicting data, undermining the overall credibility of the appraisal.

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