## Thursday, July 21, 2011

### Valuations and fuzzy math

Continuing the commentary from the last post about valuing a property. My review of recent sales suggests that using the Property Appraiser's published "market value" is a pointless exercise unless it can be used to one's benefit against an uninformed opposing party in negotiations. With a margin of error of 45 to 50%, the PA's number should be considered for entertainment purposes only.

Dismissing the PA's number, to value a property we're left with either Miss Cleo or the comps. With apologies to fans of Miss Cleo I think recently sold comparable properties are the best starting point for determining another property's value. Identical condo units in the same building are perfect comps as are identical homes in the same neighborhood. The reality is that, in most cases, there aren't "identical" comps. In that case one has to look for the most similar and then make adjustments. The most commonly used starting metric for comparing similar properties is dollars per square foot. If a 1000 square foot unit closed last week for \$100,000 then another very similar unit with 1100 square feet should be worth close to \$110,000, all other things being equal. The big stinker there is the "all other things being equal" part. They never are, equal that is. We also need to consider that both units may have exactly identical garages, have access to the very same amenities and share an identical view. This makes a comparison based only only unit size (even with adjustments for condition) flawed from the get go. Place the properties in different buildings or neighborhoods and the comparisons become even less accurate. We can't accurately calculate the value of Starry Night based on the selling price in francs per square centimeter of Vincent's Bedroom in Arles . I think comparing Cape Winds to Sandcastles just as flawed although less extreme.

Consider that a direct ocean 2/2 with 1286 square feet and a garage at Sandcastles in Cocoa Beach will command no more rent per week than a Cape Winds 2/2 with 934 square feet and open parking in Cape Canaveral. Are they worth exactly the same because of identical potential income? I don't think so but I don't think a straight \$/sf comparison is remotely accurate either. Seems illogical to think that an otherwise similar 2/2 unit in one of the two buildings should sell for a 27% premium to the other.

My point in all this is to caution buyers and sellers about their or their agent's opinions of value. Putting a fair value on a property is not an exact science. If buying, do your best to get the lowest price possible and use all the tools available to substantiate your offers. Just be aware that in the end only you know what a property is worth to you. The commonly used valuation scales are all flawed. It's horseshoes. Closest one scores.

"Sheep only have 2 speeds - graze and stampede." _________________Colonel Dave Grossman

1. And the biggest fly in the ointment is---the unknown health of the economy/lack of discretionary income/local unemployment direction. This is what effects price in every type transaction--from a bag of peanuts to housing. All your points above are completely correct.I just felt compelled to add to the thought process.

2. Make my peanuts boiled, please. When the end comes I'll watch it from the beach or just beyond in the surf.

3. All I got is Lake Erie----The beach closes anytime it rains because of sewage back up--yeck.I'll take the ocean anytime.

4. Agreed, however I do think that the valuations offer some degree of value. There is such little turnover in some buidlings/areas that getting a good idea of market value is difficult, so in addition to some decent comps (and all real estate is unique), I see the valuations as offering some degree of assistance. 2011 preliminary valuations are out and they are generally down from the prior year. I realize that this is a stastical valuation and no way reflects each individual unit, but down is down. So if I'm interested in a unit and a unit in that same building sold last year, then I would think that given the trend in the valuation, the market value of last year's sold unit is somewhat less. I wouldn't commit to the exact % decrease in value as posted by the PA - but it is one indication. Of course the unit's view and interior status all matter, but given the same exact unit - if the trend is down in the PA - the trend should be down in market value in general.

5. Funny how we speak about prices going down in almost all areas of the country. Yea-it did tick up a tad for the last two months---but--year over year prices are down. But I have tried to follow the Cocoa Beach/Cape Canaveral markets for some time and have found the prices considerably higher than average.Its shocking to see some properties jump as much as 20-35+ percent.Example would be property on Tin Roof/Cape Canaveral.Those units were down to \$125K---now the asking price is almost \$200K.You can't tell me the market has turned on the current economic conditions of today. Gotta be overly medicated sellers and or agents or I have really missed the boat.Could be I did fall of that Turnip truck going down the road.

6. Looking at the asking prices is like browsing through the fiction section at the local library. What I find more telling are the actual closed sale prices along with the price changes that sellers are making.

When a property is overpriced by \$100k and they're making \$2k reductions in the asking price, you know you don't want to deal with them any time soon.

Looking forward to the July numbers and how much the sales pace has dropped off.

7. An extreme example of how these crazy over-pricing and reduction games can play out is the listing that I commented on a couple of years ago that was dropping the price every week by \$5000 or so. It was the house on the corner of Minutemen and Danube River. Listed in December 2007 for \$1,339,000. Price was dropped 35 times but it was always over-priced. Was eventually foreclosed and finally sold last month. Wells Fargo apparently caught the over-pricing bug associated with the house as their last asking price was \$373,900 when they finally accepted \$285,000.

When it's priced right it sells. We listed a Snug Harbor home 3 weeks ago and it closed 7 days after hitting the MLS. No price drops, just priced right to start with.

8. Library!!! In a few years kids will not know the whereabouts of a library---but that's fodder for another blog.Over the last few years I have placed offers on a few nice properties in Cocoa Beach/Cape Canaveral.Those offers were spurned and the property languished on the market for months. You probably guessed the outcome. The property finally sold for less or almost identical offers I put forth. I wonder about the true professionalism of the field of agents who in my eye view are leading buyers and sellers down the primrose path of falsehoods. I would have loved to relocate to the Cocoa Beach area for the winter months. It will be interesting to follow-- and I will-- prices for the next year or better.Could be the good fairy will leave the building and reality will regain the minds of sellers and many agents--not all agents--many are top tier--but way to many should probably be selling something other than real estate. I am compelled to say--Larry does a nice job and is probably as professional and honest as they come. His blog sheds light on the markets likes and dislikes. He tells it the way it is. Well its Friday---I've rambled enough---time to sit on the beach on Lake Erie.Whoops---its raining--the sewage odor will permeate-guess the front porch will have to do.

9. Some properties will never be properly priced yet plenty are. In Cocoa Beach and Cape Canaveral about 40 to 50 buyers a month find and purchase a condo for a number they are happy with. If you are reasonable with your expectations you can definitely find a deal you'll be satisfied with. The smell of the ocean was wonderful this morning, by the way.

10. Sure----rub it in-----next thing you will be telling me about is the beautiful sunrise over the Atlantic and sunsets over the Banana River.Can't blame ya though.Back to the porch.

11. After reading your blog, back issues and posts, I'm left keenly interested in snook fishing. It's gotta be the best past time in the world and you can eat well too. You are, living the good life :)
I'm new to shopping for a condo. Of course, your blog is helping tremendously but, I'm left hanging on at least one subject. I see corner units appear to be valued more than interior units. One owner told me the SE corner is more valuable. because the ocean breeze blows gently from the SE and it keeps the air circulating when the windows are open. I heard the lighting is better on a SE corner unit and saw the difference between NE and SE corner units at dusk. I also noticed wrap around balconies on corner units are not all created equal, but normally offer more outside space than interior units in the same buildings. I am perplexed over the value of a corner unit versus an interior unit in the same building. Is it merely buyer/seller preference or is there a no-kidding tax appraiser or lender appraiser value placed on a corner unit versus an interior unit? Now I got to go buy me a surf fishing rod and reel. Any recommendations?

12. I answered the corner unit question in a new post, October 8. For snook fishing from the beach I like 15 to 20 pound line on any good spinning reel. I don't like a long surf rod for snook fishing as you do a lot of casting and the long surf rods are too heavy for repeated casting. A stiff 7'to 8' rod is perfect. If you don't have live mullet use a diving artificial like a YoZuri minnow and work the trough right off the beach. I've caught most of my beach snook within a few feet of the beach.