Blog : Valuations

Pricing Temptation

Pricing Temptation

If you own a lakefront or lake access home in the Lake Geneva market, you’re well aware of the increased broker competition in our area. New agents, new brokers, new this and new that. The old ones, they’re here too.  Everyone is an expert. Everyone a top producer. Everyone won an award at their company party. They’ve got the photos to prove it. Facebook, photos. Instagram photos. Best Use Of Technology To Showcase Expertise. That’s a nice trophy, fella.

The state legislature is about to pass a bill to make it easier for developers to develop.  Life is hard on these developers, what with the annoyances of existing zoning laws. They should be easier. More homes, more agents, more of this and definitely more of that. The market is hot. So hot. Hot Hot Hot. That’s what the ad says. Name your price. I mean it.  Trust me,  I just won this Top Producer Award for Most Residential Sides On The South Side Of Main Street During The Second Half Of January.  Surprised you didn’t know that. Look for  picture of the trophy in my upcoming newspaper ad.

Name Your Price. You think I’m kidding?  Go ahead, seller. Name it. I’ll go get it. Your house is worth $2.8MM but you want $3MM but you’re not actually going to sell unless you get $4MM? Let’s list it! You must have seen my most recent press release, right? The one I wrote about myself and the incredible awards I won at the mid-February meeting? Well, trust me. Name your price and I’ll get it. I’ve been selling lots of houses for many, many months. I’m certain I can get that number for you. I’m super enthusiastic! Can’t you tell?  In 1992 my senior class voted me Most Bubbly.

It’s February now, but it feels like March. March feels like April, sort of. It might snow tomorrow, but that won’t matter. The market is hot and sellers know it. Buyers know it, too, and they lament the heat. But really they don’t. Because many of those buyers who are buyers now where buyers in 2013 when you could have bought anything anywhere and made money on it.  Except maybe Michigan. Buyers buy when they feel motivated by competition, and sellers list higher when they feel as though they have none.

Today, the market is full of promises. Brokers will sell your house for the highest possible dollar, guaranteed! Sellers enjoy this attention, and there’s nothing that makes a seller feel more pleased than encouraging a listing competition for their home. Here’s how that works. Invite three or four brokers to your house. Tell each of them that there are others coming after they’re done.   The brokers know this, and now they know there’s competition. Competition to list the house. Competition to come up with the highest list price possible. Any seller likes a competent, skilled broker. But you know what sellers like more?  Super high list prices.

The problem, of course, with the super high list price (SHLP) is that the SHLP is actually detrimental. Sure it’s tempting. Sure it seems like a wonderful windfall. Buy Bitcoin at $19,000 because it’ll be $50,000 by the end of the month! And certainly there’s a slim chance that the SHLP finds a sucker (Zillow buyer). If that happens, congratulations, you win. But what if that doesn’t happen? What if you list the house and many months later you’re still the owner? What then?

I’ll tell you what happens then. Your house sits. You reduce your price a bit. Then you reduce it some more. Then the market stops paying attention. So you reduce again. And again. Quickly you’re below the list price that was initially suggested by the skilled agent, the one who visited on that Saturday before the other agents. You’re below that price and yet the market doesn’t respond. What to do? Red carpet open house? Balloons on the yard sign? A second yard sign? A plea on Facebook?

The answer is another reduction. This is the cycle of the seller who chose to shoot for the moon. And this is the mistake. It’s so tempting to make it. The outcome has so much potential, yet when the dust settles and the lame agent has won your listing, the only thing left to do is wait. You’ve missed your window, and now the market is going to punish you. We manage risk in our investments. We manage risk when we drive down the road. Let’s manage risk when we list our houses as well. How?

Hire the agent with the best track record in your individual market segment. Demand a thorough market analysis. Understand your sold comps and current competition. Understand the drawbacks of your property, not just the benefits.  List the house for a price near the top end of the expected sales range.  Sell your house. Be happy.

Geneva Lakefront Values

Geneva Lakefront Values

I put a new graph on this new site, on the home page down at the bottom. It aims to smooth out the rough edges of our lakefront pricing by calculating the very simplistic, very popular Price Per Foot. For those who don’t yet know, that’s a very common way of determining lakefront value. It supposes that at the end of each year a collection of lakefront properties will have sold. They’ll be very different, some super expensive others only moderately so. It totals sales prices and divides that number by the total number of lakefront width sold, and voila, Price Per Foot. This year we’re trending at $25,161 per foot. This would take a 50′ lot and assume it’s worth around $1.25MM. It would take a 100′ lot and assume it’s worth $2.5MM. And if you’re light on math skills, it would take a 200′ lot and come to a $5MM valuation. Even though this is a remarkably unsophisticated way of determine value, it often holds up.  This is the case for 2015.

But the price per foot bothers me, because it’s so simplistic. The nuances of valuation here cannot be wiped away by some basic fourth grade math. This is why I prefer a formula that includes price per foot, price per square foot of overall land mass, price per foot of the residence, and adjustments for location and market conditions. Of course this algorithm is proprietary, at least until I sell it to Zillow for $50MM and retire. Once I bank that $50MM, I’ll consult with agents, telling them, usually, that their problem is that they’re too nice, too sweet, too understanding. Then I’ll double that $50MM and look to buy some hot biotech stock so I can destroy my newly created wealth. I’ll be like the Andrew Mason of real estate. Anyway, lakefronts.

What this valuation formula does is identify a narrow range of value, and this is the goal. The range can be tweaked up or down, depending on the market conditions at the precise time of the listing. The formula isn’t fool proof, but it allows us to dismiss outliers and identify obvious value. But no matter how many words I’ve spent to get to this point, this day isn’t about valuations or about my desire to sell something to Zillow. It’s about gauging the health of the lakefront market. It’s about the inventory and the sales, the averages and the predictions. The good news is that we have some data to help us in our measurements.  A common refrain among agents is to declare the market hot, no matter if it’s scalding or tepid, no matter if it’s just smoldering or fully ablaze.  Ashes are hot, too, but they don’t point to much continued heat.

It’s easy to look at our price per foot (PPF) and assume that points us in the right direction. It’s easy to look at sold totals, and guess how things are going. But beyond all of those stats is the actual dollar volume of transacted properties. This isn’t a number you see often, so it’s a number you’ll see today. Consider, at this late date in 2015 we’ve had $68,262,140 worth of lakefront properties change hands. This excludes South Shore Club listings, because I can’t measure their frontage due to the communal ownership of the lakefront. That’s a high number, right?  Yes, it’s high, but how high? If I were Josh Flagg I’d screech at you that these numbers don’t lie, but I’m not wearing my bedazzled leather vest today so I am most definitely not Josh Flagg. $68,262,140.

Last year was a terrific year for the lakefront market. I had my best year ever, which was nice. But the lakefront printed only $35,375,000 worth of sales. 2013 was a good year, but not as good as 2014, yet $45,495,000 in lakefronts traded. 2012 was a down year for values, likely representing the bottom of the recent recovery cycle, yet value hunters were common and the market pushed out $53,800,500 worth of sellers. 2011 was the pit of despair, with late year prices crumbling, and $33,580,500 traded. 2010 was a year where no one knew what was going to happen and only the die hard bought- $33,573,000 sold.  2009 had $24,659,999 in total. 2008 was the last great year of the prior great run, and yet just $36,732,134 printed. Even 2007, when things were not yet even hinting at a wind down, just $45,666,600 closed.

Looking at the numbers from here, they make complete sense.  When the market was hot, the inventory was low, fueling more appreciation. When the market went south, buyers were scared, and volume plummeted, along with prices. As the recovery progressed from 2010 through 2014, there were fits and starts, but mostly volume consistency. The anomaly in this is the 2015 total. $68,262,140. That’s an incredible number, especially because it has occurred in conjunction with rising prices. It’s mostly owned to some top end sales, and it’s especially significant when you consider that those totals didn’t include two auction properties that would have pushed the number to $75MM, and even more impressive when you consider it didn’t include the South Shore Club volume.

With that stunning absorption of both aged and new inventory, the market is heading into 2016 in terrific shape. Inventory is low, but not stagnant. Buyers are plentiful.  The stock market threw us for a loop this year, and returns will be mostly flat. Yet the market continued its march. To understand why, just remember that even this elevated volume represents a tiny, narrow market.  The entire lakefront market revolves around 20-30 sales annually, and I’d guess at least 40% of those sales are made up of players already in the market. If that’s the case, then Lake Geneva needs scarcely 10-15 new buyers annually to keep this whole thing moving forward.  It’s no wonder the market is as exclusive as it is, and no wonder it chugs along in years good and in years bad.