Why this article matters: When forming a broker price opinion (BPO), a broker looks beyond the property itself to the various market factors which influence its value. These include the local zoning and natural hazards which impact the property, and other outside forces.

A parcel’s location affects its market price

The existence of offsite conditions and security unique to a property’s location affects a property’s usefulness. Thus, the worth to a buyer or tenant for the property and the price they pay is also affected. When known to all participants, these conditions affect marketability and value. Thus, they are considered material.

As material facts, consequential offsite conditions are disclosed using forms prepared and included in the marketing package provided to prospective buyers or a buyer agent interested in acquiring an interest in a one-to-four unit residential property. [See RPI Forms 308; 321]

Several offsite factors commonly known to influence a buyer’s decision to purchase or set the price and terms to acquire a property are listed with explanation in a form entitled Unique Factors and Conditions Affecting Property [RPI Form 308], including:

  • Notice of Airport in Vicinity: The property is located in an airport influence area which may subject occupants to annoyances or inconveniences such as noise, vibration or odors [See RPI Form 308 §2];
  • Notice of Right to Farm: The property is located within one mile of a farm or ranch land and may be subject to inconveniences or discomforts resulting from agricultural operations [See RPI Form 308 §3];
  • Notice of San Francisco Bay Conservation and Development Commission Jurisdiction: The use and development of property within this commission’s jurisdiction may be subject to special regulations, restrictions and permit requirements [See RPI Form 308 §4];
  • Notice of Mining Operations: The property is located within one mile of a mine operation and may be subject to mining-related inconveniences [See RPI Form 308 §5];
  • Notice of Industrial Use Zone: The property is located in or next to an Industrial Use Zone which allows manufacturing or commercial uses [See RPI Form 308 §6];
  • Notice of State or Federal Ordnance: The property is located within one mile of a former state or federal ordnance location, such as those used for military training purposes [See RPI Form 308 §7];
  • Notice of Contamination of a Controlled Substance: A government health official has identified the property or immediate vicinity as being contaminated by methamphetamine or another controlled substance in the prior three years [See RPI Form 308 §8];
  • Notice of Death: A death has occurred on the property within the prior three years [See RPI Form 308 §9];
  • Notice of Insurance Claim Affecting the Property: An insurance claim affecting the property has been filed within the previous five years, and may increase the cost of insuring the property for subsequent owners [See RPI Form 308 §10]; and
  • Notice of Other Conditions affecting the property or immediate vicinity for the agent to list. [See RPI Form 308 §11]

Criminal and security activity in the neighborhood surrounding a property for sale which might affect a property’s worth to a buyer are not specifically listed in either the Notice of Unique Factors or the Transfer Disclosure Statement (TDS). [RPI Forms 308; 304]

Both disclosures are mandated for use in one-to-four unit residential sales transactions. However, the TDS broadly calls for the seller to provide information regarding neighborhood nuisances without limitation to items listed on the pre-printed TDS form.

Lesser disclosure when dealing with a homebuyer is deceit, a fraud on the buyer by the seller and the seller broker marketing a one-to-four unit residential property.

Related article:

Lessons from the Field: Incomplete TDS

Neighborhood crime and security conditions

Crime has an adverse impact on both a prospective buyer’s decision to purchase and the parcel’s market price. Thus, criminal activity on or in the area of the property is considered a material fact sellers and seller brokers disclose at the inception of discussions detailing information on a property for sale. Criminal activity includes instances of:

  • vandalism;
  • petty theft;
  • late-night noise disturbances; and
  • violent crimes.

Any security efforts undertaken by a property owner to mitigate the risks of criminal activity are themselves part of those material facts, including the presence of:

  • a security system;
  • fencing;
  • lighting; and
  • video cameras.

A seller agent prepares a Seller’s Neighborhood Security Disclosure Addendum on a property marketed for sale or lease. As a disclosure, the form is included in the agent’s marketing package for delivery to prospective buyers on inquiry into details about a property. The form addresses aspects of security on or about the property, and known or readily available information on security conditions on or in the area of the property. [See RPI Form 321]

Each section of the Seller’s Neighborhood Security Disclosure has a separate purpose regarding the security of the property’s occupants. The sections include:

  • a statement from the seller disclosing any investigative reports on the adequacy of the property’s security arrangements [See RPI Form 321 §2];
  • security precautions already undertaken, including steps taken by the seller or prior owner to prevent security breaches [See RPI Form 321 §3];
  • conduct on the property by a tenant, their pets or visitors which endangers others or the property of another [See RPI Form 321 §4]; and
  • any other specific criminal activities occurring on the property during the past two years, including theft, vandalism, trespass or assault. [See RPI Form 321 §5]

While the disclosure of security conditions concerning a property is not yet statutorily mandated, disclosure of material information “readily available” to sellers and seller agents, and “relevant to a buyer’s decision” are required by courts to be disclosed as an agent’s duty. The agent marketing a property is required to know what it is they are marketing.

However, purchase agreements do include as they must, the web address of the sex offender registry, www.meganslaw.ca.gov. This statement statutorily shifts the burden of discovery to the buyer and buyer agent to investigate the existence of sex offenders in the neighborhood of the property. [Calif. Penal Code §290.46, CC §2079.10a ; See RPI Form 150 §11.16]

While a BPO report is not likely to include comment on neighborhood crime and thus the extent of its impact on pricing, the result will be indirectly present. The market prices recently paid for comparable properties in the immediate area of the subject property will reflect the level of concern buyers have for the presence of criminal activity.

Related article:

Brokerage Reminder: Neighborhood Security – Is it safe out there?

Elements shaping a property’s pricing

A broker price opinion (BPO) is the broker’s analysis and estimate of a property’s market price. The price is set as the fair market value (FMV) determined by the broker on a specific date and documented in a written BPO report.

The BPO report includes data collected and analyzed by the broker which substantiates their opinion of the property’s market price — its FMV. The FMV of a parcel of real estate, given as a dollar amount, is typically determined based on the sale of comparable properties and, for income producing property, the capitalization of the property’s net operating income (NOI).

Several different market prices might be developed for a property. In real estate evaluation, the most common type of pricing used is “market price,” also called FMV.

By definition, the FMV of a property is the price on the date of the BPO evaluation a willing seller and buyer would agree to, both having equal knowledge of the property’s various uses and material facts. [Calif. Code of Civil Procedures §1263.320]

Factors used in the evaluation process to determine a property’s current market price include:

  • demand – the number of buyers for the property;
  • utility – the property’s possible uses;
  • scarcity – the availability of similar properties; and
  • transferability – the seller’s ability to transfer good title to a buyer clear of all encumbrances except those itemized in a title insurance policy.

Collectively, these are known as the elements of market price, memorized using the acronym DUST.

Forces influencing market price

The operating forces inherent to a property, without concern for its worth to a prospective buyer, which directly influence market price include:

  • location considerations — the property’s proximity to commercial amenities, access to transportation, the availability of freeways, beaches, lakes, hills, etc;
  • economic considerations — rents in the area, vacancies and the percentage of homeownership, as well as employment opportunities lost or gained;
  • government considerations — property taxes, zoning, building codes, and local services such as police and fire protection; and
  • social considerations — crime rates, school ratings, shopping and recreational opportunities.

Memorize these forces influencing a property’s market price by using the acronym LEGS.

Factors not used to determine a property’s market price include the present owner’s:

  • acquisition and improvement costs;
  • property taxes and assessed value;
  • asking price;
  • mortgage financing (when the mortgage is non-assumable); and
  • equity in the property, except when seller financing is available.

The role of economic fundamentals in evaluation

Several economic concepts come into play in a broker’s evaluation of a parcel of real estate.

These concepts used for evaluation purposes, sometimes called economic principles or fundamentals, include:

  1. Supply and demand: The principle of supply and demand asserts that once the supply of available homes decreases, the market price of homes increases — the same or greater number of buyers are making demands on a decreased supply of homes available for sale. This principle correlates to the density of the population and its level of income, the issue of local demographics.
  2. Change: The principle of change recognizes that property is constantly in a state of flux. The change a property experiences is seen in the parcel’s life-cycle. The life-cycle of a property has four stages: development, stability, decline and old age.
  • Development of the property includes subdivision into horizontal or vertical parcels, onsite and offsite improvements completed and, with occupancy, the start of a neighborhood community.
  • The stability stage of a property, such as a home located within a community, comes about when the property reaches a level of improvement where changes are only made to maintain appropriate living conditions.
  • The decline stage starts when the oldest buildings begin to deteriorate, lower social or economic groups move into the community and larger homes are converted into multi-family use.
  • The revitalization or gentrification stage occurs when the neighborhood is recognized as suitable for renewal. This most often occurs in more urban areas where high costs force younger and first-time buyers to create a market through the renewal or replacement process.
  1. Conformity: The principle of conformity confirms that when similarity of improvements is maintained in a neighborhood, the maximum market price of a property can be obtained on a sale. Zoning regulations and conditions, covenants and restrictions (CC&Rs) allow specific uses for a property and exclude nonconforming uses.

The principle of conformity has subcategories for specific variables from absolute conformity, including principles of:

  • regression: The principle of regression indicates that the market price of a property with the most usefulness in a neighborhood is adversely affected by the market price of other less useful properties in the neighborhood. An example is an over-improved home. Here, an owner makes significant improvements, such as adding additional rooms, interior and exterior amenities and landscaping, and the neighbors do not. Thus, the property is no longer as similar to the others. When sold, the over-improved home will not command a price which includes the full cost of the over-improvements.
  • progression: The principle of progression, in contrast to regression, indicates that the market price of a smaller sized property in a neighborhood of larger properties is positively affected and sells at a higher price than the property will have sold for in a location of comparably sized properties.
  1. Highest and best use: The principle of highest and best use holds that the greatest market price of the property is realized when its use is maximized. The test for highest and best use requires that the use be physically possible, legally permissible, economically feasible and achieve the maximum productivity (memorized by the acronym PLEM).
  2. Contribution: The principle of contribution holds that the value of one component (of improvements) is measured in terms of its contribution to the market price of the whole property rather than its separate individual cost. For example, a property’s FMV may increase when additions, such as a swimming pool, are added, but not necessarily increase equivalent to the amount of the improvement’s cost.
  3. Substitution: The principle of substitution notes that a buyer will not pay more for a property when it will cost less to buy a similar property of equal desirability. The principle of substitution is the most basic principle for an evaluation as it is used in each of the three approaches to determine market price.

Geographic influencers on market price

Unlike property improvements, which can be fixed or replaced, geographic influences — such as natural hazards — run with the land. Often, humans can do little to permanently alter their effect on property and humans.

Locations likely to subject a property to natural hazards include:

  • special flood hazard areas, a federal designation;
  • potential flooding and inundation areas;
  • very high fire hazard severity zones;
  • wildland fire areas;
  • earthquake fault zones; and
  • seismic hazard zones. [Civil Code §1103(c)]

The existence of a hazard due to the geographic location of a property affects its usefulness or desirability, and thus its pricing for prospective buyers. Hazards, by their nature, limit an owner’s ability to develop the property, obtain or maintain insurance or receive disaster relief.

A seller may employ a broker to market a property for sale or market the property themselves. Either way, the seller is obligated at the earliest opportunity following a request for property information from a prospective buyer or a buyer agent, to disclose any natural hazards known to the seller and discoverable by a seller in a search of public records.

To unify and streamline the seller’s disclosure of natural hazards to a prospective buyer of a property, a statutory form was created entitled the Natural Hazard Disclosure Statement (NHD). [See RPI Form 314]

The NHD report notes whether the property available for sale is located within two miles of an existing or proposed airport, an environmental hazard zone called an airport influence area or airport referral area.

The buyer’s occupancy of property within the influence of an airport facility may be affected by noise and restrictions, now and later, imposed on the buyer’s use as set by the airport’s land-use commission. [CC §1103.4(c]

Environmental hazards

Environmental hazards are human-made noxious or annoying conditions which are hazardous or a nuisance for humans. As environmental hazards, the conditions are classified as either:

  • injurious to the health of humans; or
  • an interference with an individual’s sensitivities.

Environmental hazards affecting an occupant’s use and enjoyment of a property are batched as either:

  • located on the property; or
  • originating from offsite sources.

Environmental hazards located off the property, but still having an adverse effect on the use of the property and in turn its pricing, arise due to noise, vibrations, odors or some other ability to inflict harm, include:

  • military ordnance sites within one mile of the property; [CC §1102.15]
  • industrial zoning in the neighborhood of the property; [CC §1102.17]
  • airport influence areas established by local airport land commissions; [CC §§1103.4(c), 1353; Calif. Business and Professions Code §11010(b)(13); See RPI Form 308] and
  • ground transportation arteries which include train tracks and major highways in close proximity to the property.

Environmental hazards located on the property which pose a direct health threat to occupants due to construction materials, the design of the construction, the soil or its location, include:

  • asbestos-containing building materials and products used for insulation, fire protection and the strengthening of materials; [Calif. Health and Safety Code §§25915 et seq]
  • formaldehyde used in the composition of construction materials; [CC §2079.7(a); Bus & P C §10084.1]
  • radon gas concentrations in enclosed, unventilated spaces located within a building where the underlying rock contains uranium; [CC §2079.7(a); Bus & P C §10084.1]
  • hazardous waste from materials, products or substances which are toxic, corrosive, ignitable or reactive; [Health & S C §25359.7; Bus & P C §10084.1]
  • toxic mold; [Health & S C §§26140, 26147]
  • smoke from the combustion of materials, products, supplies or substances located on or within the building; [Health & S C §§13113.7, 13113.8]
  • security bars which might interfere with an occupant’s ability to exit a room in order to avoid another hazard, such as a fire; [CC §1102.16; Health & S C §13113.9] and
  • lead.

Environmental hazards have an adverse effect on a property’s usefulness and worth to its occupants. As an interference with the use of a property, they are considered defects. As the hazards might affect a prospective buyer’s decision to purchase the property, they are considered material facts disclosed to prospective buyers before they enter into a purchase agreement.

Related article:

Does a seller’s broker breach the fiduciary duty owed the seller by failing to disclose material facts that impact a property’s value?

Local government ordinances

Local zoning laws, ordinances or regulations restricting or regulating the occupancy, use or enjoyment of a parcel of real estate are also material facts. A prudent buyer or tenant with knowledge these land use facts exist might alter their decisions on pricing, terms of purchase or even to purchase.

For example, a prospective buyer seeks out income-producing residential property for investment in a rent controlled community. However, the price paid for income property is the present value (PV) of the property’s future flow of net income. Unless fully apprised of the effect rent control ordinances have on their ability to alter rent amounts or remove a tenant, an investor cannot set the PV for the property’s future net income.

Further, annual rent increases for ownership of multiple residential properties by entities are capped at 5% plus the rate of inflation under statewide rent control codes. [CC §1947.12(a)(1); CC §1947.12(h)(1)]

Also, local governments often have their own rent control ordinances. These affect residential income property owners as they are enforceable when they provide more tenant protection — keeping landlord profits in line with consumer inflation — than statewide rent control codes. [CC §1947.12(m)]

For another property pricing example, single family zoning in California was effectively eliminated in 2021 by the converting of all SFR zoning to subdivision and multiple units on one parcel.

However, local politics suppress SFR property value by attempts to exploit exemptions from the multi-unit SFR zoning situation as city councils are pressured by NIMBYs to designate property as:

  • located in a historic district;
  • located in a wildlife sanctuary; or
  • a designated landmark. [Calif. Government Code 65852.21(a)(6)]

Even so, a homebuyer expecting to improve the use of a property adding an accessory dwelling unit (ADU) or by subdividing — or just good old renovation — needs to confirm the parcel does not fall into one of the city council’s NIMBY zoning wars.

A buyer broker evaluating a property as suitable for their buyer-client needs information on the local politics for permitted use of the parcel to determine whether to acquire the property, and if so, at what price. Some local agencies are not amenable to compliance with state law.

Related article:

Restrictive central city zoning fuels construction for wildfires