The effect of proximity to a registered sex
offender's residence on single-family house selling
price.
by Larsen, James E.^Lowrey, Kenneth J.^Coleman, Joseph W.
This study shows that a monetary burden must be borne by house
sellers in close proximity to a registered sex offender's
residence. Examining single-family house transactions that occurred in
Montgomery County, Ohio, during 2000, a significant negative effect upon
selling price is discovered due to a house's proximity to the
residence of a registered sex offender. The effect is an increasing
function of proximity that varies with the community notification system
employed, which in turn depends on the risk the offender poses to the
community. Limited disclosure is the notification system used for
offenders deemed to present a relatively greater risk to the community.
Under this system, the sheriff's office notifies owners of houses
adjacent to the offender's residence and school officials (who
sometimes notify the parents of students). Passive notification is the
disclosure system used for offenders deemed to present relatively less
risk. Under this system, interested parties must contact the
sheriff's office to discover the location of an offender's
residence.
It is intuitive that larger discounts would be associated with the
proximity of a house to a more dangerous offender compared to proximity
to a less dangerous offender. It also is a reasonable assumption that
larger discounts would be associated with a notification system where
authorities take an active role in the process compared to a system
where they do not. Because we are unsure if the public distinguishes
between offender classifications, we cannot be certain whether the
difference in selling price effect discovered here is due to the
relative risk posed by the offender, or if it is due to the notification
system employed. If the public does not distinguish between offender
classifications, differences in selling price effects should not be
present when the same notification system is used for all offenders.
Perhaps this could be tested in a state that employs the same
notification system for all offenders.
The study results are consistent with both of the above
possibilities. Where limited disclosure applies, significant selling
price effects are greater and extend farther from an offender's
residence than when passive notification applies. Where limited
disclosure is employed, the significant negative effect extends to 0.3
mile from an offender's residence. Compared to comparable houses
located farther away from an offender, on average, houses located within
0.1 mile of an offender sold for 17.4% less. Houses located between 0.1
and 0.2 mile from an offender sold for 10.2% less, and houses located
between 0.2 and 0.3 mile from an offender sold for 9.3% less.
Where passive notification is employed, the significant negative
effect extends to 0.2 mile. Compared to comparable houses located
farther away, on average, houses located within 0.1 mile of an
offender's residence sold for 7.5% less, and houses located between
0.1 and 0.2 mile from an offender sold for 5% less. Despite the
relatively compact areas where significant price effects occur, a
substantial number of the houses in the sample were located close enough
to an offender that they may have been affected. Approximately 7.7% of
the houses were located within 0.3 mile of an offender subject to
limited disclosure, and approximately 25% of the houses were located
within 0.2 mile of an offender subject to passive disclosure.
The study results may actually understate the true financial effect
of proximity to an offender's residence because the model did not
include a variable for time on the market. From the seller's
perspective, extra time on the market lowers the present value of the
selling price. The presence of an offender may motivate some owners to
accept a low offer to consummate a sale, and the model employed here
captures that effect. However, if the owners want an undiscounted price
for their house, they may have to extend their search time because
knowledgeable buyers will either refuse to make an offer or lower their
offer to account for the presence of the offender. To the degree that
owners wait for an undiscounted offer from an uninformed buyer, failure
to include time on the market will mask the true effect of proximity to
an offender on the effective selling price. An examination of additional
markets with reliable time on the market data seems a logical extension
to this research effort.
To keep the problem tractable, two important assumptions were made
concerning the impact of offender proximity on the selling price of
nearby houses: that the presence of a more dangerous offender dominates,
and that the presence of the nearest offender dominates. This does not
imply that the presence of additional offenders located farther away has
no effect. Future research efforts could examine the effect of proximity
to multiple offenders in the same classification as well as interaction
effects between offender classifications.
Implications for Residential Appraisers
What are the implications of this study for residential appraisers?
First, this problem is likely to become more widespread because the
number of registered offenders is growing. As a result, appraisers may
want to modify the appraisal process. As a prerequisite, it is suggested
that the appraiser ascertain the local price effect, if any,
attributable to proximity to a sex offender. If no effect is present,
maintain the status quo. We suspect, however, that the findings
presented in this article are not unique. If a price effect is
discovered, it is suggested that when estimating value with the sales
comparison approach, an adjustment to comparable selling price may be
warranted to account for offender proximity. In certain cases, it also
may be prudent to place more reliance on the cost approach.
In valuing a single-family house, many appraisers place heavy
reliance on the sales comparison approach. In fact, it is not unusual
for the final estimate of value to equal the indicated value derived
from this approach (with the cost approach used primarily as a device to
ensure the reasonableness of the sales comparison's indicated
value). This practice can be maintained if the price effect due to
offender proximity is identical for the subject property and each
comparable property. If this is not the case, appraisers must modify
their methodology to accurately estimate value using the sales
comparison approach. The potential effect of proximity to an offender
must be calculated for the subject property, as well as the effect
included in the transaction price for each comparable. Then, each
comparable's sale price should be adjusted to account for the
difference in offender price effects between the subject and the
comparable.
The actions of an appraiser in response to this study also depend,
in part, on the purpose of the appraisal. For example, the adjustment
described in the preceding paragraph is warranted if the purpose is to
support a mortgage loan, or if the appraisal is being prepared for an
individual contemplating the acquisition of a house for investment
purposes. However, if the appraisal is to establish value for the
origination of an insurance policy or for supporting an insurance claim,
it is suggested that the cost approach be assigned more importance in
arriving at the final value estimate. After all, if the
above-recommended adjustment to the sales comparison approach results in
a lower value estimate, this does not reduce the replacement cost of the
property. Also, to the extent the offender proximity effect is reflected
in the comparable sale prices, a lower value estimate could result
whether or not the adjustment is made.
Finally, it should be noted that most of the offenders in this
study did not change their residence during the study year. However,
because offenders are free to move (and report to authorities their new
location), the financial burden associated with an offender's
presence may be transitory for a particular house owner. A determination
of exactly how long it takes for the negative price effect to disappear
after the offender leaves remains a topic for further research.
Table 1 Descriptive Statistics of Sample Transactions
Standard
Variable Mean Deviation Minimum Maximum
Selling price (dollars) 83,075 56,662 10,000 595,000
Living space (square feet) 1,355 581 320 5,947
House age (years) 62 23 2 192
Lot size (acres) .361 .984 0.14 16.4
Bathrooms (number) 1.339 .563 0.5 5
Distance to nearest limited
disclosure 1.659 1.676 .004 13.284
offender (miles)
Distance to nearest passive
notification 0.574 0.714 .002 10.318
offender (miles)
Table 2 ANCOVA Results
Limited Disclosure Passive Noticification
Offenders (PROX set at Offenders (PROX set at
at > .2 & <= .3 mile > .1 & <= .2 mile)
COPYRIGHT 2003 The Appraisal
Institute Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.
Copyright 2003, Gale Group. All rights
reserved. Gale Group is a Thomson Corporation Company.
NOTE: All illustrations and photos have been removed from this article.