Urban… or Suburban?
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Difference between Urban and Suburban locations
Last week, I asked your input regarding why in many cases appraisers check suburban in the Neighborhood Characteristics when often the subject’s location is actually an Urban area (at least from the definitions perspective below). The example I used was from an actual report. The subject property is located within a city of 90,000 population. It has typical urban services, including police and fire protection, utility water deliver and sewer service. It is surrounded by competing subdivisions, nearby shopping, colleges, city administrative offices and business buildings. It is also close to Interstate 5, parks, etc. There is undeveloped open space nearby. Built-up is shown to be over 75%. But the subject neighborhood is characterized as Suburban!
I asked for input, and have received several dozen responses, which I’ve read, and truly appreciate getting.
Several appraisers asked for ‘my’ definition of Urban, Suburban and Rural. So before going further, let’s get that out.
These are not ‘my’ definitions. These are in The Dictionary of Real Estate Appraisal – 4th Edition, published by the Appraisal Institute. They have recently released the 6th Edition, which I don’t have. If any of you have that version, please compare and let me know if the definition revision has changed.
Urban – Describes a mature neighborhood with a concentration of population typically found within city limits or a neighborhood commonly identified with a city.
Suburban – Describes a neighborhood that contains complementary properties with less concentrated population than is typically found in an urban neighborhood.
Rural – Pertaining to the country as opposed to urban or suburban; land under an agricultural use; areas that exhibit relatively slow growth with less than 25% development.
Most of the responses I received had the viewpoint that Urban is only in downtown cores with high rise buildings. One appraiser stated that to be Urban, an area must have ‘industrial’ facilities for jobs in the area. If not, Suburban or Rural. Others said that even if a concentration of population surrounds the subject site, the subject neighborhood could be designated as Suburban, despite its density being similar to the urban density. This happens in metro areas where densely populated unincorporated areas are within the surrounding significant incorporated metro area with similar density.
Note that none of the definitions mention those perceived appraiser factors. In fact, the availability of ‘services’ is not mentioned, which is how many appraisers and others may define these three areas.
The definitions above all relate to population density. They are pretty simple to understand. Only Rural speaks to perceived distance (i.e., in the country) from a core urban or metro area; Urban and Suburban do not.
The check boxes for Built-Up also relate to population density.
One point I was trying to make last week is that Urban can be anywhere, not just in a core metro area, as some appraisers believe. It means that if population density of the subject’s neighborhood is similar to the population density area surrounding the subject, it can correctly be classified as Urban. It also means that the small cities or towns out in the boonies across this country can also be classified correctly as Urban, if that’s where the subject property is located.
The same population density aspect applies to Suburban and Rural.
Many appraisers related the ‘ring’ approach, which I can agree with. That means the central core of the rings is Urban. The next ring out with lower population density can be classified as Suburban. The farthest ring out is Rural, which has the lowest population. The subject will be in one of those rings, or close to a real or imaginary boundary between two rings, which is the challenge for appraisers.
So that brings us back to the ‘form’ check boxes, and indirectly, UAD. UAD is a game changer for all of us. UAD is big data on steroids. UAD is checking EVERY report we do. It looks for errors and inconsistencies, either from the Appraiser Quality Monitoring electronic review, or from the voluntary Collateral Underwriter electronic review.
The check boxes in the Neighborhood section are actually asking for characteristics about the subject’s NEIGHBORHOOD that you have described in the comment sections below those check boxes. The check boxes are not asking for ‘how does it compare to somewhere else.’ You could, if you wanted, describe the difference between the subject’s defined area, and the others, elsewhere in the report.
This is the other issue that was most prominent in the responses I’ve received. For years, appraisers have thought about, compared and appraised the subject ‘relative to’ something else, rather than ‘absolutely’ by itself. I realize the form itself has driven this perception.
That’s the game changer of UAD. And actually, truth be told, that’s the way Fannie/Freddie imagined reports should be done from way back when… Except that they never properly informed or taught appraisers about this. So without clear direction, appraisers have gone off on tangents quite often. UAD is forcing ‘us’ to be more consistent.
UAD asks for specifics on properties. UAD expects those specifics to remain the same into the future until some documented change happens with the property. UAD also means that appraisers absolutely should take time to really think about responses on the blasted forms.
The other aspect of this situation is, for years, underwriters and others upstream from appraisers have forced appraisers into regimented reporting results concerning the neighborhood characteristics. It’s what I call the “One Mile Rule.” This rule no longer exists. But many surrounding us (and even appraisers) have not gotten the message.
The rule was simplistic: Urban comps must be no farther away from the subject than 1 mile; Suburban up to 5 miles; and Rural could be nearly unlimited. With UAD, Fannie finally realized that this “rule” no longer makes sense. In fact, this rule is not enforced when Collateral Underwriter (associated with UAD) finds and spits out up to 20 sales that they incorrectly term ‘comparables.’
Appraisers have been checking the Location box based on comp location, not due to the actual neighborhood characteristics.
And let’s not forget the unwarranted ‘ban’ on using the Rural checkbox by many lenders up until recently. They were afraid it meant ‘farming’ which does not in many cases. They thought they couldn’t make a loan on a property with Rural location checked.
Fannie also has done away with the 10%, 15%, and 25% adjustment guidelines. For basically the same reasons why the “One Mile Rule” has been abandoned.
Here’s what I suggest: Adopt the definitions shown above. Put those into your reports in a section for Neighborhood Characteristics. Then add a statement that your checkbox entries on form page 1 reflect the characteristics/population density (i.e., Built-Up) you observed IN THE SUBJECT’S NEIGHBORHOOD, not relative to anywhere else in the world. Add wording to say that the ‘One Mile Rule’ is not valid any longer. Then when you get the ‘stip’ that implores you to adhere to ‘their’ rule, point the complainer to that section in your report.
You need to tell report readers why neighborhood characteristic boxes are checked. Don’t let someone else in a multi-story downtown Manhattan office, or the AMC clerk 5 states away, dictate to you what they think the neighborhood should be.
This is how ‘we’ take back our responsibility to do what ‘we’ should have been doing all along, while traipsing down the primrose path we call appraising.
On a more light-hearted note, I have attached a sheet you might want to print and hang on your office wall.
And two appraisers provided a different description of what Rural / Suburban / Urban means, which I’ve embellished a bit:
Rural – where cows gleefully reside and chew their cud with few distractions, except for flies
Suburban – where rats hang out, and rummage through humanity’s droppings
Urban – where rats, some with well-known names, and as big as cows have set up colonies