You’ve probably heard homeowners and prospective home owners talk about the advantage of buying the cheapest house on a given block. This is typically solid advice because when a home is surrounded by higher-valued properties, its own value goes up. This is known as the principle of progression. The opposite is also true – when a home is surrounded by lower value properties, its own value goes down despite it having amenities that typically make homes appraise for more money. This opposite principle is known as the principle of regression.
As a real estate agent, it is important for you to be familiar with both of these principles and how they play out in real-life scenarios because you will come face-to-face with them as a working agent. This is true whether you work as a seller’s agent or a buyer’s agent. It’s also true if you choose to go into commercial real estate. Every piece of real estate’s value is impacted by the other properties around it, which can in turn fluctuate in value based on migration patterns, social and economic progress, and even the presence of certain retailers. For example, homes near Trader Joe’s supermarkets tend to be valued higher than homes that aren’t nearby Trader Joe’s stores. Similarly, homes located near hospitals, cemeteries, and power plants tend to be valued lower than similar homes that aren’t located near these types of service providers.
Examples of Progression in Action
Due to progression, a home can appraise for a higher amount than a similar home in another neighborhood appraises for, even when that home is worth less than the homes surrounding it. Neighborhood factors that drive up property values and thus, increase appraisal values for relatively low-value homes in the neighborhood include:
- Proximity to public transportation;
- Proximity to high-ranking schools;
- A high median income for residents in the neighborhood;
- Access to retail, particularly certain retailers like Whole Foods and Trader Joe’s;
- A low crime rate; and
- The aesthetic appeal of the homes in the neighborhood. This can include mature growth trees, manicured lawns, and well-maintained homes that look appealing from the street.
To illustrate this principle with a real-life scenario, let’s assume a three bedroom, one bathroom home in Neighborhood A, a middle-class neighborhood full of older three bedroom, one bathroom homes that backs up to a wooded area, appraises for $300,000. A very similar home in Neighborhood B appraises for $340,000, despite having the same layout, number of bedrooms and bathrooms, and being in similar condition. How? Because in our example, Neighborhood B is comprised mostly of newer homes that each have three to four bedrooms and at least two bathrooms. To top it off, Neighborhood B is within walking distance to the train station, which cuts commuters’ need to use their cars to and from work. The three bedroom, one bathroom house in Neighborhood B is worth more than the one in Neighborhood A because the houses around it are worth more.
How Real Estate Appraisers Use the Principle of Progression to Value Properties
Progression is an important principle for real estate appraisers to understand, because it is a principle they use regularly to value homes and commercial buildings. Real estate appraisers value properties as part of divorce proceedings, mergers, acquisitions, commercial sales and purchases, and for prospective home buyers during the purchasing process. This last reason is especially important and often, is the key to making a sale for a buyer.
A real estate appraiser values a property by comparing it to similar properties nearby based on their square footage, amenities, upgrades, and overall home size. With these factors in mind, each home being compared is assigned a price per square foot. To see the principle of progression in action, a real estate appraiser charts the homes he or she is comparing as dots on a graph, which show a trend upward when homes become more valuable due to progression.
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