Juicy rationalizations

Shrimp boat at sunrise.

Six ways to present an offer:

• Here's an offer for your property. I think it's fair.
  
• Here's an offer for your property and it's fair because it's exactly what the property appraiser's site says the market value is.
• Here's an offer for your property which is more than fair because it's 10% higher than Zillow's estimate of the property's value.
• Here's an offer for your property which is fair because these carefully selected comps I've included support that price. Never mind that two are nowhere near the size of yours and the other is a side view.
• Here's an offer for your property. I know it's worth more but this is all I can pay.
• Here's an offer for your property. It's fair because the last four comparable sales (attached) justify a fair value right around my offer price.

Unless offering full asking price, it is usually productive for a buyer to include some justification or rationale for his offering price. Usually. I've seen every one of the above examples employed over the years. Some of these strategies appear to begin the negotiating process with a better chance of success. However, using a flawed or obviously slanted approach can sometimes have a detrimental effect. The absolute best approach to determination of value is using recently sold, nearby comparable properties of similar size and condition and adjusting for differences. Cherry-picking only the comps that support one's offer is not an effective strategy if offering to an even slightly informed or well-advised seller. The same goes for sellers trying to falsely justify an inflated asking price. Two sources of estimated value commonly used by buyers to justify their offering prices are Zillow and the property appraiser's "market value". Both are often wildly inaccurate.

Zillow.com publishes an estimate of value for every residential property, called a Zestimate, on their website. I often see buyers, sellers and their agents using Zillow as confirmation of their opinion of value, when that Zestimate happens to coincide with their opinion. Is it an accurate estimate and should it be taken as credible? Let's look at recent sales and see just how accurate Zillow was with their estimate of value right before the sale. I used the first page of results for recent residential sales on Zillow (22 sales) of properties in Cocoa Beach for my research.

Of the 22 recent sales the Zestimate immediately prior to the sale was within 5% of the selling price for seven properties. Not bad. Five of those sold for more than the Zestimate and two sold for less. Another five sales landed between 5% and 10% of the Zestimate. All but one of those five sold for more than Zillow's estimate. That means that slightly more than half (55%) of recently sold properties closed within 10% of the Zillow estimate of value, all but three closing for more than the estimate. That means in a broad sense that we can trust Zillow to be within 10% around half the time.

What happens the other half of the time? The skew gets extreme. Four estimates were 20% or more off the closing price, all of them closing for more than the Zillow estimate. One closed for 20% more, one for 35% more, one for 85% more and one property that had a Zestimate of $163,000 sold for $325,000. That's 99% higher than Zillow's published estimate of value.

What does this mean for a buyer or seller of property? Feel free to use the Zestimate as substantiation of your opinion of value if it is to your benefit but don't place any value on it other than as a tool when negotiating with an uninformed party. Don't be surprised if your opponent rejects it as she may have done her own research or may be a reader of this blog.

What about using the property appraiser's "market value" as a gauge to establish fair value for a property? Using the properties that have recorded from the same list of 22 recent sales, the PA's "market value" was off more often than Zillow's and by a wider margin. Most often it was far below the eventual selling price but a few estimates were way above. Don't expect any accuracy except by accident when using either of these estimates of value. There is a reason appraisers use side by side comparisons with other recently sold, nearby properties of similar size, adjusting for differences when doing most residential appraisals. It is the only consistently accurate gauge of market value available to us. The amount of error and variation in the online estimates of value make them good for entertainment if one is so inclined but not as a reliable guide to a property's value.

By the way, the "I know it's worth more but this is all I can pay" offer has it's place. If a buyer wants a property but can't pay what the comps suggest is a fair price, it's sometimes worth a try. The seller may reject the offer but there's always a chance she will accept it. I've seen that kind of offer accepted.

"I don't know anyone who could get through the day without two or three juicy rationalizations." Michael - Jeff Goldblum's character in The Big Chill

Cornering the market

This is a question posted by a reader in the comments to an earlier post. I thought it relevant enough to respond in a post rather than the comments.

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?

This is much discussed and a question which has no clear answer. As pointed out, corners come in all shapes and sizes. All other things being equal, a corner should command more than an interior unit. However, all things are rarely equal. Besides the issue of size, here are some questions a buyer or an appraiser must consider when comparing a corner unit to a non-corner (by no means a comprehensive list);

• Is the balcony better than the interior units? Some interior units have better balconies than the corners like the double-wide interior units at Cape Winds. Some buildings like the Constellation have extra balconies in all units, corners and interior.
• Are there more windows or extra balconies and do they make the unit more or less desirable?
• Does it have a better garage? Often the prime garage units or extra garage spaces are assigned to the corners.
• Is the privacy and/or view compromised because of a building next door or the pool deck just below? A southeast corner with a wrap balcony staring at the building next door might be less desirable than an interior unit in the same building.

I would generally prefer a southeast corner to a northeast because of the exposure to the southern winter sun. However, if there is a building immediately next door to the south, maybe not. The northeast corner in that particular building might have better views and more privacy. With our winds generally out of an easterly direction I don't see a significant wind exposure difference between northeast and southeast. In some buildings which have neighboring buildings on both sides the interior units might command a higher price than the corners. Ultimately, each corner unit has to be judged on it's features. There is no one-size-fits-all adjustment. I asked a local appraiser this same question last week. This is the response;

Adjustments for corner unit vs interior are obviously most relevant when a condo is new and there is a selection of units to choose from. For existing condos, I do not make an adjustment for end unit vs. interior, as, like you indicate – there are just not enough comps to extract a supportable adjustment.

There you have it. Thanks to the appraiser for the input. Draw your own conclusions. You probably know what you like when you see it and what it's worth to you. Hopefully the seller of that perfect unit is willing to accept what you're willing to pay. Good luck in your search.

"Under some conditions, it is rational for competitors to make their products as nearly identical as possible." __Hotellings law

Out with September [updated again 10/16]

A tasty snook caught in the surf with a Yo-Zuri minnow.

October 1, 2011 and the mullet run is in full force with billions of mullet making their annual migration down the beach shadowed by predators of every sort; tarpon, snook, bluefish, jacks, Spanish mackerel, sharks, ladyfish, trout, redfish and others. It's almost impossible to drop a baited hook or lure in the water without it being immediately crushed by a hungry something.



UPDATE 10-16 - The sold numbers for condos changed since the original post when the tardy listing agents finally recorded their sales for September. I edited the numbers below to reflect the changes. The trend didn't change, just the total sales.

Mortgage rates continued their drop in September with the average 30 year fixed rate hovering just above 4%. That extremely low rate didn't seem to be a factor as far as condo sales were concerned in Cocoa Beach and Cape Canaveral. Of the 32 condo sales in September recorded on the Cocoa Beach MLS, 25 or 78%, closed for cash. Things were a little different with single family home sales with only three out of eight (38%) closing for cash.

Two of the eight single family home sales were foreclosures but there were no short sales closed in the month. The highest sale was a foreclosed 5 bedroom canal home in the Cocoa Beach Country Club area that sold for $680,000. The lowest price was $155,000 for 3/2 in Harbor Heights, the other foreclosure. It sold after 14 days on the market for $5000 more than asking price. Another of the Enclave of Cocoa Beach homes closed, this one for $515,000. The eight homes closed for an average of 95% of last asking price.

No condos closed in the month for more than $349,000. Slightly more than half were oceanfront. Of the 32 recorded sales, 47% were distressed, seven foreclosures and eight short sales. The short sales took an average of 105 days from contract to close. The 32 condos sold for an average of 91% of last asking price.

Condo inventory in Cocoa Beach and Cape Canaveral this morning stands at 365 units, seven of those in a yet-to-be-built building and 15 at Mystic Vistas. There are 39 listings asking more than $500,000. Ten units have closed for more than $500,000 in 2011. By contrast, 150 units have closed for less than $100,000 this year with just 55 units actively for sale right now asking less than $100,000.

[update 10-16] What I forgot to mention in the post above was the extreme fall-off in the number of condo sales. With 32 recorded condo sales, September 2011 was the slowest month this year. We have to go back to December 2009 to find a month with fewer sales. With inventory at such a depleted level this trend is likely to continue. It's getting very difficult to find attractive deals in the well picked-over MLS and priced-right new listings are selling quickly. A third of all sales in September sold in less than 30 days on the market. The more specific a buyer's criteria, the faster he should be prepared to move when a matching property gets listed or price-dropped into reasonable range.

The temp was in the low 60s this morning when the sun rose over the ocean and highs for the next 10 days are not expected to exceed 84. It's a great time to be in Cocoa Beach. Our summer visitors are gone for the most part and the winter guests have yet to arrive. The beaches are deserted, there is very little traffic and you can walk onto the Cocoa Beach Country Club golf course without a tee time. Not to mention the fishing is on fire and the occasional passing tropical storm blesses us with clean surf. See you on the beach or in the water.

"In the short run, the market is a voting machine. In the long run, it is a weighing machine." ______Warren Buffett

Mission creep

Not the Bahamas. It's the tip of the Cape on September 25, 2011.

Mission creep: the tendency of a target or goal to change or evolve as a mission progresses. It's a rare property search that doesn't involve some mission creep.

A typical condo search will usually begin a with a list of important criteria. One's mental image of the perfect ocean condo might be a three bedroom, upper floor corner unit with a two car garage in a complex with tennis courts, pool and hot tub that allows weekly rentals and large dogs. If searching in Cocoa Beach and Cape Canaveral that search is over before it begins as that particular unit doesn't exist. The mission to find an acceptable unit is going to have to creep away from the initial target. There are some criteria or combo of criteria that so limit a buyer's choices that a unit is unlikely to ever be found. If looking in Cocoa Beach and Cape Canaveral for a three bedroom condo that allows weekly rentals the choices are immediately reduced to five complexes. The same shortage of choices exists with complexes that will allow a dog over 50 pounds. Combine the two criteria and you've eliminated all the possibilities. Similarly, making a two car garage a must have will severely restrict the possibilities. Not impossible but begin to add other unbending criteria and the list starts to rapidly shrink.

It makes sense before beginning a search to list all the things that are important and to decide which ones are must-haves. A list of pretty units assembled from the MLS or Realtor.com might not contain a single unit that will work because of missing features or restrictions not mentioned in the listing. Talk to your agent about the reality of finding a unit that matches your criteria before putting together a list of units that look good but may not work for you. You might decide that a two car garage is not as important as being able to bring Scrappy Doo to the condo with you. Prepare for the possibility of mission creep. Deals are out there and flexibility increases your choices.

"It is widely believed, especially in the court of public opinion, that a true theory can have no failures and a false theory no successes." ___Eliezer Yudkowsky

August by the numbers

Grounded sailboat at Jetty Park, Port Canaveral.
Photo by Lauren Lulich.

In the month of August twelve single family homes closed in Cocoa Beach as reported by our MLS. Median price was $315,000, and all but three were waterfront, two of those oceanfront. There was one reported single family home sale in Cape Canaveral but it was actually a half-duplex. Prices ranged from $681,000 for a short sale 5 year old Snug Harbor home on Edwards Bay to $239,000 for a non-waterfront 3/2 with a 3 car garage on Esther. Another of the twelve Enclave homes in Cocoa Beach closed in the month making five this year. This one sold for $490,000, a far cry from the original million dollar plus asking. Two of the 12 August sales were short sales and none were foreclosures making a total of 17% of home sales distressed. Seven of the buyers paid cash.

August was a record month for condo sales with a total of 57 MLS-listed units closing in the two cities. None sold for more than $500,000. Median price was $133,500. A whopping 79% (45 units) of the 57 total sold for less than $200,000. The former bread and butter of our market, direct ocean units, made up only 14% of the activity (eight units) a reflection of one of the most heavily impacted parts of our depleted inventory. Eight of the total were foreclosures and ten were short sales making 32% of the total condo sales distressed. Highest price paid of the 18 distressed sales was $203,000. Forty three or 75% of the total of the buyers paid cash. The average sale was for 91% of the last asking price.

Inventory this morning, September 12, 2011 is at it lowest point in my memory. There are 353 total condo and townhome units for sale in Cocoa Beach and Cape Canaveral and 74 single family homes. Of these 427 residential units for sale, eleven are foreclosures and 56 are short sales making 16% of the total distressed, well off the recent crazy high percentage.

We are now in the sweet season with the summer crowds gone and snowbirds yet to arrive. What little traffic there is is just blissful locals with surfboards and fishing rods hanging out of our vehicles. There is surf most days, the water is warm, the air not so much and the mullet run is in full swing. If you've never visited Cocoa Beach in September or October you have missed the best time of year.

Many men go fishing all of their lives without knowing that it is not fish they are after. __Henry David Thoreau

Inventory breakdown

I didn't have any reason for choosing the categories below other than whimsy. We are feeling the supply squeeze in several areas of our market as the numbers illustrate.

Cocoa Beach and Cape Canaveral MLS - August 31, 2011
___________________________
Condos and townhomes for sale
<$100,000______57
>$300,000_____103
>$500,000______42
bank-owned_____10
short sales______48
Total all prices__360

Condos sold since January 1, 2011
<$100,000_____132
>$300,000_____32
>$500,000_____10
bank-owned____56
short sales_____60
Total all prices__373
___________________________
Single-family homes for sale
<$300,000__________28
>$500,000__________22
non-ocean waterfront__32
oceanfront___________5
bank-owned__________1
short sales__________4
Total all prices_______73

Single-family homes sold since January 1, 2011
<$300,000__________66
>$500,000__________12
non-ocean waterfront__41
oceanfront___________5
bank-owned__________7
short sales__________18
Total all prices_______98
___________________________

I never keep a scorecard or the batting averages. I hate statistics. What I got to know, I keep in my head. __Dizzy Dean

After the storm

Last week RealtyTrac published it's findings about foreclosure and distressed sales for the second quarter of 2011. According to their release, "sales of homes that were in some stage of foreclosure or bank owned accounted for 31 percent of all U.S. residential sales in the second quarter of 2011, down from nearly 36 percent of all sales in the first quarter." In Florida the number was 35% of all second quarter home sales trailing six other states. Highest level of distressed sales was Nevada with a whopping 65% followed by Arizona 57%, California 51%, Michigan 41%, Georgia 38%, and Colorado 36%. Florida at 35% was just one percent more than Michigan at 34%.

Looking at the MLS data for Cocoa Beach and Cape Canaveral, 26% of all Q2 sales of residential properties were distressed putting us in the same range as Virginia and Washington state. As of this morning August 28, distressed properties make up just 14% of total MLS residential inventory in the two cities.

My numbers for our market, because I've used only the MLS data, are probably slightly different than the numbers would be using the RealtyTrac methodology. However, because I suspect that private, non-MLS sales are probably skewed more towards non-distressed sales than the other way, my numbers may actually overstate distressed activity as a percentage of total sales. Because they do contain the lion's share of sales I trust that they reflect the local reality. Draw your own conclusions.

I hope all of you in the Northeast make it through Irene unscathed with no residuals except a good story. Most of us here are moving a little slower this morning after two days of epic surf. Stay safe.

One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man. __Elbert Hubbard

August half-time report

August property sales have somehow maintained (so far) the strong pace of the first half of the year even with a rapidly declining inventory. Of the 41 closed residential sales posted in the Cape Canaveral and Cocoa Beach MLS as of this morning, August 21, 27% were distressed, five foreclosures and six short sales. Ten of the 41 sales were single family homes, all in Cocoa Beach and all but one waterfront. Two were direct ocean, one a 50 year old cottage with small guest house that sold for a shocking $415,000. Small and needing work but wow, $415. I would have expected a bare lot on the ocean to bring more than that.

Surprisingly, with 30 year fixed rate mortgages at an all time low (4.15% national average) cash is still king and almost the only game in town where condo sales are concerned with 81% closing with cash. The majority of single family homes are also selling for cash with only four of the ten home buyers getting a mortgage. I suppose that property at depressed levels is a more attractive parking spot than equities after the hammering of the stock market in the last month.

Inventory this morning stands at 369 condo and townhome units in Cocoa Beach and Cape Canaveral and 77 single family homes. Of the single family homes for sale, 39 are waterfront, exactly the number of waterfront homes that have sold in the last six months.

I'll get into specific August sales of note in a later post. Highest forecast temp for the next ten days is 90 and that's just for one day. We look to get some effect from Tropical Storm Irene next weekend which is expected to be a hurricane by then. Tis the season. Off now to enjoy some waves from the persistent small swell that's been hanging around for what seems like weeks. If you have any questions about property or have anything to share about our market shoot me an email to larry@southcocoabeach.com. Peace.

Efficiency is intelligent laziness. __David Dunham