How Zoning Can Impact Property Values

How important is the zoning of a property? When an appraisal is performed on a property whether the property is residential or commercial, a part of the appraisal process is to determine the zoning of a property. Then an appraiser determines if the zoning is considered to be a legal use, an illegal use, a legal nonconforming use (grandfathered use), or if there is no zoning at all.

What is Zoning?

Zoning is defined as: The public regulation of the character and extent of real estate use through police power; accomplished by establishing districts or areas with uniform restrictions relating to improvements; structural height, area, and bulk; density of population; and other aspects of the use and development of private property. (The Dictionary of Real Estate Appraisal, 4th Edition)

There are various types of zoning:

  • Single- Family Residential

  • Multifamily Residential

  • Planned Unit Development

  • Commercial

  • Industrial

  • Mixed-Use

  • Public Building Facility

  • Airport

Some cities have zoning maps located on their websites however the city can always be contacted to provide the zoning for a property located within their city limits. By appraising in various cities in our markets, I can confidently state that each city has its own unique zoning. Some are simple and some are very complex. Some very small cities do not have zoning at all. When an appraisal is performed on your home, the appraiser is to determine the zoning for the property if any. Most of the rural areas that we appraise in North Texas that are located outside city limits do not have zoning. However, some properties or developments located outside the city limits will have deed restrictions.

What is the Highest and Best Use Analysis?

Determining the zoning of a property is a part of the Highest and Best Use Analysis that is performed for an appraisal, this would include vacant land, residential properties and commercial properties. A Highest and Best Use analysis of a property is performed both "as if vacant" and "as improved".

When performing a Highest and Best Use Analysis an appraiser will make four determinations:

1. What is physically possible? - If the property is zoned for residential use with minimum lot size of 10,000 sq ft and the property is only 7,500 sq ft then it would not be physically possible for residential use.

2. What is legally permissible? - This is where the zoning comes in. Is the property a legal use based on the zoning? What are all the permitted uses under the zoning?

3. What is Financially Feasible? - This takes into consideration the financial aspects of the property. Would the use produce a positive return?

4. What is Maximally Productive?- This analysis will decide which of the uses produces the highest value.

This is just a brief summary of Highest and Best Use analysis. A more in-depth description of the aspects of Highest and Best Use might be for another post.

How would zoning impact the value of a property?

Residential :

Most of the residential properties that we appraise are typically zoned single family residential and are a legal permitted use.. There are some occasions where a property may have a legal non-conforming use (grandfathered use) such as a