How do we know the value of a Lake Martin waterfront lot? Have you ever seen two that are exactly alike? Do appraisers base their finding based on a feeling, or is there a formula?
Yes, there are several formulas, but only one that works at Lake Martin: Comparable Sales.
Every now and then, out-of-town appraisers come to Lake Martin and are paid to make decisions about property value on our lake. And they often bring their city-style pricing methods with them. I’ve seen it enough, and have had to have this conversation with buyers often enough that I felt a real study of lot pricing methods was due. I wanted to combine our MLS sales data with the anecdotal evidence I’ve been collecting for years.
I’ve been saying for a few weeks now (Part 1 and Part 2 of this series) that Lake Martin waterfront lots are best valued by the Comparable Sales method. I’ve walked you through two other methods that don’t cut it in our Lake Martin market: Price Per Waterfront Foot and Price Per Square Foot/Acre. The time has come address the most accurate valuation tool, the Comparable Sales Method aka the Sales Comparison Approach.
“The Comparable Sales Method uses data from the sales of similar properties to estimate the market value of a piece of real estate. This is a common method of assessing the value of real estate . . . In most cases, several similar properties are used in the analysis.” (About.com) So what I do when helping a potential seller determine a list price for their lake property is look at other similar sales. A perfect comparable sale would be one that is geographically close, with a similar view, privacy, water depth, and waterfront footage, etc. Properties that have already sold are called “comparables,” and the lot you are trying to value is called the “subject.”
When the Sales Comparison Approach is used, choosing the most comparable sales is a critical part of the equation. To make things simple, let’s think about deed restricted developments on Lake Martin first. The old real estate cliché of “location, location, location” does apply at Lake Martin. Over the years, buyers have shown a preference to select lots that are inside deed restricted neighborhoods with covenants and homeowners associations.
One takeaway from this study is that the Comparable Sales method is labor intensive. It requires a working knowledge of the area – otherwise how to know which sales are most comparable? It also supposes an understanding of what buyers value in a Lake Martin lot. Like most real estate pricing, it is not an exact science, but I think you can get pretty close. There is no getting around it, no shortcuts, no magic formula. One simply has to buckle down and find the most comparable sales and then adjust to match the subject. For instance, if a comparable lot sells for $185,000, and I think that its view contributes 10% more value than the subject’s, then I would subtract 10% or $18,500 from the sales price to arrive at an estimation of the subject of $166,500. I try to get two of three more comparables, and average their adjusted sales prices, and presto, I have my estimation of value.
Obviously it gets a little more tricky to find comparable sales for properties that are not in formal neighborhoods at the lake, and there are some that are not. But it can be done, and done well with the proper research. The same goes for properties with homes.
The Sales Comparison Approach is also the preferred method by residential appraisers, so we shouldn’t be surprised that is the most accurate here at Lake Martin.
That is not to say that waterfront footage should be ignored – not at all. When using the sales comparison approach, if two lots are ceteris paribus except for waterfront footage, consideration should be given to the lot with more feet at lakeside. There is a place for adjustment for waterfront footage, but only as a secondary, fine tuning after first selecting good comparable sales. Much like a set of scales at the doctor’s office has two weights – a large one to get you close, and a small to get you exact:
Hopefully this study dispels the impulse of using waterfront footage as a starting point, or as the primary driver of estimated sales price. The numbers just don’t work. I also hope that using a price per acreage or per square foot will not be used at all.
And now, having read all three parts of this math heavy series on lot pricing, I declare you to be a graduate of the Lake Martin Voice School of Graphs and Charts! Congratulations!
Caveat: If you call me to list your waterfront home or lot, and you tell me you have a “feeling” your Lake Martin lot should sell for X because Lake Martin lots generally sell for X per square foot, I’m going to make you go back to Part 1 and retake the course.
Links to Related Material:
Lake Martin Waterfront Lot Pricing: An In-Depth Study Part 1
Lake Martin Waterfront Lot Pricing: An In-Depth Study Part 2