Friday, August 12, 2022

What is the source of value?



“Mine’s better than yours” (this is the cleansed version) or “Bob and Mary’s house sold for “x” dollars  and ours is much nicer.” Statements like these are frequently made by owners who intend on selling their property. So what determines if Bob and Mary’s house is worth less or more than someone else’s?

First, let’s determine who dictates the marketplace. “It’s the greedy real estate agents,” you say. Wrong! In today’s market, it’s the buyers who want to steal properties and sellers who allow them to do it; and let’s not forget the banks who contributed the collapse of the real estate market. The real estate agents have little ability to effect value; however, they can provide guidance to create more value.

In a normal marketplace (such as 7 or 8 years ago) there is a reasonable supply and a reasonable demand; and the first law of economics dictates. By analyzing the normal market, we begin to discover what factors contribute to the value of a home. Next we examine the neighborhood. Does it consist of homes that are reasonably similar (such as same size lot, similar design and construction, etc.) such as row housing. The other scenario is where lots vary substantially in size and designs are often customized, etc.

Since I don’t want to offend anyone, I’ll reference neighborhoods where houses are similar as “generic” as opposed to “row” housing developments. I use the term row housing since many of us are familiar with the term (that’s those of us who claim to be young, but are happy to be on Medicare). There are many generic developments in Collier County and a few, of lesser scale, on Marco Island. To be more specific to the readership, Collier Boulevard (951 corridor) has several between U.S. 41 and I-75. I would also identify a condo project as generic since most of the units similar.

In a generic community, the houses (or units) are very similar in design, the lots sizes are similar, the age of the house is within a few years and they have common amenities available; and due to the size of the community there is going to be a history, whether small or vast, of recent sales activity. Here the value is relatively easy to determine. One determines a base and adds or subtracts items that the house has, or doesn’t have compared to others and the absorption rate. In most markets, placing a value on a property doesn’t take a doctorate degree.

Now let’s consider the situation where there are few similarities within the neighborhood or the community. Let’s look at Marco Island as an example. Sure the lots are similar in size, but that’s where the similarities generally end. Some buyers shy away from a larger lawn (some require a part time job to pay the water bill), some want more space or distance from the neighbor, but the value will not vary significantly. There are areas of the island where all the lots are much larger and that does add value.

There are areas with a common street passing through from one neighborhood to another. In one the houses are circa 1970’s with 1,000 to 1,500 square feet and a block later the houses are circa 1990’s with houses ranging from 2,000 to 3,000 square feet. Here one cannot compare one neighborhood with the other. While one may consider comparing by using replacement costs, one needs to acknowledge that no one would replace or build to the standards of the 1970’s. That is, no one in today’s market will build a 1,000 square foot house, they would not have 8 foot ceilings, nor would they choose a one car garage. Thus, to assess value to a house built in the 1970’s, one can only compare the “like kind” properties.

For a little bit of history, the most popular houses built in the 1970’s, by the Deltona Corporation, were two plans: the Crusader, a 2 bedroom, 2 bath with a screen porch and a one car garage totaling approximately 1,200 square feet (under air); and a 3 bedroom, 2 bath house with no screen porch and a one car garage totaling approximately 1,450 square feet (under air). Ironically, neither of these would be allowed under the present city code. All houses must meet the minimum of 1,500 square feet (under air) or suffer the penalties inflicted by government officials. I think the penalty is 20 to 40 lashes depending on the square foot shortage.

Getting back to assessing value, unless there are “comps” (a list of sold houses), calculating the appraised value can be a guessing game. However, a real estate professional with a history of experience and a thorough knowledge of the marketplace is capable of providing a better assessment than many appraisers that is simply looking at the comps; my apologies to those appraisers who do a great job. You know who you are. An active real estate professional not only looks at comps but sees and senses, yes senses, the pulse and direction of the market.

To finalize, in times past, there have been instances when I, and other real estate professional with which I have worked have recommended increasing the asking price of a property and the properties sold at the increased price within a short period of time. While we aren’t there yet, my crystal ball says it’s around the corner.

Marv Needles is the broker/owner of ERA Flagship Real Estate which he founded in 1973. He has been a full time resident of Marco Island for over 40 years.

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