As real estate professionals, it is essential to navigate the complexities of the market and employ diverse valuation methods when assessing the impact of adverse property conditions or stigmas. While the popular saying suggests that real estate values are determined by "location, location, location," there are additional factors at play that must be considered. The reported value of a property is not merely a number but a reflection of human emotions and perceptions. Accurately measuring these intangible aspects requires employing appropriate valuation techniques.
Negative perceptions can significantly diminish the value of a property. These perceptions may be irrational, unsupported, or influenced by media coverage. The resulting loss in value can be rational or irrational, temporary or permanent. Diminution in value represents the difference between the unaffected value and the impaired value of a property, typically attributable to increased costs or risks caused by adverse conditions. The impact of these conditions varies based on the property and its surroundings, necessitating a thorough evaluation in each case. Real estate professionals must differentiate between actual adverse conditions, which may warrant diminution, and implicit bias, which should not influence the valuation process.
But what exactly leads to value diminishment? There are tangible harmful conditions that can exist within or outside the property, such as construction defects, geotechnical issues, health-related problems, or environmental concerns. Additionally, intangible factors like past events involving crime, suicide, or cult activity can also diminish value. In some instances, such events have resulted in a 10% to 25% reduction in value, as supported by research. Adverse conditions can be a consequence of natural or human factors, curable or incurable, but all have the potential to negatively impact value and marketability.
Valuing diminution in value can be a challenging task, even for experienced real estate professionals. A comprehensive understanding of the market is crucial to accurately assess value impairments and their significance to both the general and specific market, especially concerning the subject property. An impairment can affect an entire community, a particular neighborhood, or an individual property. Determining the impaired value requires more than a simple deduction of remediation or repair costs from the unaffected market value. The overall effect can only be realized by comparing the before-and-after scenarios, including any market resistance post-repair.
When an impairment exists, the valuation process incorporates three damage approaches: the cost effect, the use effect, and the risk effect. The cost effect considers the expenses involved in repairing or remediating the impairment. The use effect evaluates the change in overall utility and property usage. The risk effect pertains to the altered perception of increased risk or uncertainty. These three factors parallel the traditional approaches to value and must be cautiously employed in the impairment valuation process.
A term often associated with diminution in value claims is "stigma," which represents the loss in value beyond the cost of repair. Stigma is synonymous with risk and uncertainty, as it reflects the damage to a property's reputation. A parallel can be drawn with a damaged car that, even after repair, is still considered flawed by consumers, leading to a diminished post-accident value. Simply rectifying the damage is often insufficient to fully account for the stigma.
In the realm of real estate, stigmatized properties encompass various scenarios, such as those associated with murder, suicide, foreclosure, criminal activities, or rumored paranormal phenomena. While a stigma typically connotes an adverse condition, there are instances where certain conditions can enhance the value, such as a property once occupied by a famous personality or benefiting from a rails-to-trails conversion.
As a real estate professional, whether you are assisting sellers in pricing their properties or conducting appraisals for lenders or clients, it is vital to be aware of how to value material factors, both tangible