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Diminution of value in real estate appraisal refers to the reduction in the market worth or perceived value of a property due to various factors. Black's Law Dictionary definition: Rule of damages which provides the difference between “before” and “after” values of property, which has been damaged or taken. These factors can be external (outside the property) or internal (related directly to the property itself). Here are some common examples:
External Factors:
Neighborhood Decline: If the neighborhood experiences an increase in crime rates, deterioration of infrastructure, or a decline in nearby amenities like schools or parks, the property's value may decrease.
Environmental Changes: Events such as the construction of a landfill nearby, contamination of groundwater, or the installation of high-voltage power lines can negatively impact property values.
Economic Conditions: Economic downturns can affect property values, leading to diminished demand or lower prices in the area.
Changes in Zoning: If zoning regulations change, affecting how nearby properties can be used (e.g., from residential to commercial), it can impact the value of neighboring properties.
Local development: A new large scale development may be built affecting traffic and access. A new freeway may be contemplated affection pollution, noise, traffic...
Internal Factors:
Structural Issues: Problems such as foundation cracks, roof leaks, or termite damage can decrease a property's value unless repaired.
Outdated Features: Homes with outdated kitchens, bathrooms, or obsolete heating systems may be less attractive to buyers, reducing their market value.
Poor Maintenance: Lack of upkeep, such as overgrown landscaping, peeling paint, or broken fixtures, can make a property less appealing and lower its value.
Loss of portion of property or loss of use of portion of property: A neighbor's wall or building could be trespassing upon the subject property limiting access, use and enjoyment of the subject property.
Legal and Market Factors:
Legal Encumbrances: Easements, restrictions, or pending legal issues (like ongoing litigation involving the property) can decrease its value.
Market Perception: Negative perceptions about a property (e.g., a notorious event occurring there) can reduce its value beyond physical characteristics alone.
Example Scenario:
Consider a house located near a new freeway under construction. The noise, increased traffic, and potential pollution from the freeway may decrease the property's desirability and, consequently, its market value. This is an example of external diminution of value.
Alternatively, a property with an outdated kitchen and bathroom, which hasn't been renovated in decades, may not attract as many buyers as similar homes in the neighborhood with modern amenities. This represents an internal diminution of value.
In real estate appraisal, identifying and quantifying diminution of value involves evaluating these and other factors to determine the fair market value of the property under current conditions.
The DIV can sometimes be calculated by valuing the property as if whole then valuing the property as affected by the condition then calculating the difference or loss in value.
Mary Cummins of Cummins Real Estate is a certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.
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