The Costs of Flood Zone Uncertainty

The cost, in terms of final transaction price, of being in a flood zone is established. Specifically, it appears that being in a flood zone reduces the final transaction price of a property between 4.1% and 4.3% on average [i], [ii]. These estimates assume flood zone status is clearly denoted in the MLS. However, what happens when the flood zone status of a property is unclear during the marketing process of a property, which is very often the case as flood zone mapping, is notoriously inaccurate? Are there any indirect costs such as a lower likelihood that the property will close? Concurrently, does flood zone uncertainty create a lower probability of a broker earning a commission?

This question is answered in Chang, Dandapani, and Johnson (2010)[iii]. In this study, the authors investigate for a lower chance of a closing due to uncertainty over a listing being located in the 100-year flood zone. In this particular study, properties in the MLS where listed as either: (a) property is definitely in the 100-year flood zone, (b) property is definitely not in the 100-year flood zone or (c) it is uncertain if the listed property is in the 100-year flood zone.

The study finds that properties listed as uncertain if they are in the 100-year flood zone are, on average, marketed 1.22 times before a closing actually occurs. Thus, uncertainty over flood zone status in the MLS leads to a 22% greater likelihood that the seller will not close their property during a given typical listing period. This, of course, directly translates into a 22% greater chance that the listing broker will not earn a commission or, in the case of a relisting, the listing broker will have to work 22% more to earn the same commission.

Implications

In general, the results from Chang, Dandapani, and Johnson (2010) indicate that ambiguity in information entered into an MLS is not harmless. Thus, great care needs to be taken over the accuracy of MLS data entry. Basically, uncertainty is costly to both the listing broker and the seller of property. In particular, the results strongly suggest the need for an updating of the flood maps currently employed to determine flood zone status as clearer and more easy-to-understand maps expedite the selling process, thereby reducing the costs to sellers and brokers alike.

ENDNOTES


[i]. Harrison, D.M., G.T. Smersh, and A.L. Schwartz, Environmental Determinants of Housing Prices: The Impact of Flood Zone Status, Journal of Real Estate Research, 2001, 21, 3-20.

[ii]. Guttery, R.S., S.L. Poe, and C.F. Sirmans, An Empirical Investigations of Federal Wetlands Regulation and Flood Delineation: Implications for Residential Property Owners, Journal of Real Estate Research, 2004, 26, 299-315.

[iii]. Chang, C.H., D. Dandapani, and K.H. Johnson, Flood Zone Uncertainty and the Likelihood of Marketing Success, Journal of Housing Research, 2010, 19:2, 171 – 184.

© Copyright Ken H. Johnson. This material may be freely duplicated and republished under the following conditions: (a) the author’s name must be clearly visible; (b) the author’s journal affiliation must be clearly visible; and (c) the author’s university affiliation must be clearly visible. Otherwise, this material may not be reproduced in any form without the written consent of the author.

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