The Neighborhood’s Going to Hell! So Sue Your Neighbors For Destroying the Value of Your House!

Posted June 16th, 2016.

Categories: The Calculating Lawyer.

Property Value Mark Guralnick

Some people have the greatest neighbors. Not everybody. When your neighbor is a manufacturing plant, a fracking operation, or a poorly managed dog kennel, you may have a legal claim for nuisance, trespass, waste, or  other claims. You may have a right to sue for damages — but how much?  How do we determine the diminished value of your home?

Real estate appraisers commonly apply three general approaches to valuing real estate: (1) the sales comparison approach; (2) the cost approach; and (3) the income capitalization approach. Each of these approaches can be modified to explore the amount of damages suffered in a real estate case.

The sales comparison approach essentially compares a particular property with comparable properties that have recently been sold to establish a property value. Applying the principle of substitution, this approach assumes that a buyer would not purchase a property for any price greater than what he would pay for a comparable property, consisting of similar features and characteristics, and presumably sold in the same locale under similar market conditions.

When a legal dispute arises and the value of a certain property has been thereby diminished, the sales comparison approach can be utilized to determine the monetary damage affecting the subject property. The specific method is known as matched pair analysis or paired sales analysis.

Let’s assume, for example, that a homeowner claims that his home has been devalued by a manufacturing plant that has recently expanded its operations onto a bordering tract of land, causing loud machinery noises and malodorous air pollution. His home is described as a two-story Colonial, with four bedrooms, two-and-a-half baths, a two-car garage, and a large backyard sitting on one-half acre in a suburban residential tract.

matched pair analysis Mark Guralnick

Using the matched pair analysis, the subject home would be compared to one or more similar homes located elsewhere in the community that are not affected by the deafening machines or the foul-smelling air quality. The comparable homes should be two-story Colonials with four bedrooms, two-and-a-half baths, and other similar characteristics. If the match between the subject home and the comparable home is accurate, then the difference in the sales prices should reflect the value of the damages attributable to the nuisance caused by the abutting manufacturing plant.

Assume then the subject property has sold (or can be sold) for $300,000. Three similar properties not affected by the noise or the pollution (Comp1, Comp 2 and Comp 3) have sold for higher amounts. The damage suffered by the subject property owner would be an averaged difference between the sales price for the subject home and the sales price of each of the comparable homes, as shown below.

Comparable Properties Sales Price Difference ($$) From Subject Difference (%) From Subject
SUBJECT $300,000
COMP 1 $412,000 $112,000 27.18%
COMP 2 $368,000 $68,000 18.48%
COMP 3 $379,000 $79,000 20.84%
Average of Comps $386,333 $86,333 22.35%

 As the table depicts, the three comparable homes, unaffected by the adverse conditions, drew higher sales prices than the subject property. The average price of a comparable home was $386,333, which was $86,333 more than the sale price of the subject property. This represented a difference (a loss in sales value) of more than 22%.

Attorneys who used a matched pair analysis must be prepared to defend against two common attacks on this approach. The first attack is that the homes chosen for the comparison are not comparable. Challengers will frequently argue that the homes selected as being comparable homes are, in fact, differentiated by some feature or amenity. While the “comps” may all be two-story Colonials, two-and-a-half baths, and two-car garages, other distinctions may render the match invalid.

Damages Mark Gurlanick

For example, one of the comps may have stand-alone, window-based air-conditioning units instead of central air-conditioning. Another comp may have a swimming pool or a fully built basement. If this is the case, it may be necessary to adjust the figures to account for the differences. Therefore, if a comparable home with a swimming pool sold for a greater amount partly because of the swimming pool, then the value which the swimming pool added to the sales price used to make the comparison.

 An abbreviated way to depict the matched pair approach, with such an adjustment, is:

Damages = 

Sales Price of Comp Home

 – Adjustment (Swimming Pool Value)

– Sales Price of Subject Home

 If a comparable property with a value-adding swimming pool sold for $400,000, of which $10,000 could be attributed to the swimming pool, and if the subject property could draw only a $300,000 purchase price, then the dollar value of the damages suffered by the subject homeowner would be:

$400,000 – $10,000 – $300,000 = $90,000

 A loss of $90,000 off the price tag would represent a 22.5% reduction.

 The second common attack on the matched pair analysis is the proximate cause argument. Challengers are likely to assert that the differences in price between a subject property and comparable property are not attributable exclusively to the event or the circumstances on which the legal action is based. If the case is based on a civil tort claim for damages based on nuisance theories attributable to noise and air pollution, the defendants may argue that other factors – market conditions, age of the properties, or specific transactional conditions – account for the difference in the sales price. The defense would contend that the industrial operations at the nearby plant are not the proximate cause (or the exclusive cause) of the difference in the market values of the subject property and comparable homes elsewhere in the community.

Expert testimony may provide the necessary evidence to prove causation and damages. Yet perhaps the parties can settle the claim before trial by agreeing that the defendant is responsible for a certain percentage of the diminution in value of the subject property. If the defendant concedes 60% responsibility, then the formula shown above can be modified as follows:

           Damages =

            Sales Price of Comp Home

                – Adjustment (Swimming Pool Value)

                – Sales Price of Subject Home

            Multiplied by percent of responsibility

Using the figures above, we’ll apply 60% as the percent of responsibility:

             $400,000 – $10,000 – $300,000 =$90,000

            $90,000 x 0.60 = $54,000

The defendant would then be obligated to pay $54,000 in damages, assuming that the cause of action was otherwise proven and the matter was amicably settled.

 Appraisers and other technical experts may apply the sales comparison approach using a variety of other, more sophisticated, comparison techniques. These include trend analysis, proximity analysis, and multiple regression analysis which use larger data sets and/or survey research. However, the simplified matched pair analysis discussed above, as modified by the appropriate adjustments, offers a reasonable approach for calculating damages in a real estate case.   Tomorrow:  The Cost Approach.

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