The other day I was out looking at a property. It was a decent property with plenty of nice features but the value was just not there. If only this property was just a few blocks the other way I thought to myself, values would be very different. I went back to my office and got to wondering why values were so different. Why did a few blocks matter so much? Artificial boundaries seem to be part of the answer.
The Setting
The property I was looking at was a grand old house built at the turn of the last century. It lies in a neighborhood that is surrounded by other grand old houses, many of them now cut up from single-family to multi-family units. Many of these homes show their age. They look a bit tired and worn.
Less than two blocks away across a major boulevard, sit very similar properties. The street names are the same. The lots are the same. The homes are of the same style. Yet values are much higher.
Why then the big difference in values when so much is the same? With a little investigation, I found two artificially created boundaries. These are zoning district and school district boundaries. These artificial boundaries have had a large impact on these two areas.
Some History
The areas I’m talking about were developed at a time before zoning was very common. Back then, neighborhoods tended to develop a bit more organically as opposed to the more rigid “planned” manner they are today. Land uses such as single family homes and four-plex apartments were often mixed together. This mixing of land uses worked to prevent concentrations of apartments or rental properties, making it difficult for any one land use to have a huge effect on values.
After World War II, things changed. Zoning took hold. Zoning by its nature is very rigid. Land uses were separated, with single family being located in one area and multi-family being located in another. The boundary between these two types of land uses was the major boulevard I mentioned. Why there? Who knows? But the effect is evident. By concentrating allowable multi-family uses in one area, the old homes were slowly converted over time. There are a few single-family homes still located in the area but their value has been reduced. After all, why would a homeowner want to live in an area surrounded by apartments when they could go two blocks the other way and not be? These homes were effectively removed from the single family market but the demand never lessened. Thus, prices for those in single family only zones rose.
Schools
The school zone is the other boundary I discovered. The major boulevard is also the dividing line between school zones. On one side, the school district is perceived to be much better, not so much one the other. I really do not know about the actual performance of either school, but I do know that perception is often reality. People will pay to be located in what is perceived to be a better school district. They will not pay for what is perceived (rightly or not) to be a lesser quality school district.
These artificial and arbitrary boundaries matter. They matter greatly. As such, they are items that a real estate investor should investigate as they are examining properties. Today, with most information easily available on the internet, it is fairly easy to do so. I would even suggest taking some time and examining the zoning and school district boundaries for your particular market. Get to know them and know how they affect values. Knowledge is power and location, location, location are the three most important words in real estate. Knowing the location of these two artificial boundaries may just give you that extra step you need to keep ahead of your completion or out of a bad deal.
Very interesting. Good insight.
Thanks Joe. These boundaries are out there and they can make or break deals. It’s important for investors to realize this and know where they are.