Pricing Equality

I suppose if I were pressed, I’d confess that the subjective nature of real estate pricing bothers me. Not the fact that one property is worth something to one person and something else to another, because that’s just personal preference and within any identified value there is a normal range of acceptability that will reflect one person’s interest or another person’s lack of. Instead, what bothers me is the concept that, in real estate, and as it relates to pricing, no one is right and no one is wrong. This is similar to winning a red ribbon for participating, when we all know that only the blue ribbon goes to the winner.

Seeing as how I watched Lincoln last weekend, it seems as though we must invoke Lincoln while he invoked Euclid and state that things which are equal to the same things are equal to each other. This should be a truth in real estate as it is in life. If a property has 100′ of frontage, as does its neighbor, and the home is in similar condition and similar size and the emotional enjoyment of each home is the same when viewed from the same spot on the same shore, then those two properties that are equal to those sames things are, in theory, equal to each other. In real estate, we must take this comparison a step further and take those equal things and detract from the one if it has a tangible deficiency when compared to that other, similar, thing. This isn’t all that hard.

But this is when real estate bends towards the subjective, and pricing becomes all about the he said, she said, the winning and the losing, the weeping and the rending, the stubborn and the amused. Real estate valuations should be based upon factual, concrete evidence, to the extent that this evidence in individual cases exists. If a home sells for, let’s say $3.25MM, and the neighboring home is similar, if less equal, then it stands to reason that the neighboring home is worth either the same or less. There is a right way to value a property, and there is indeed a wrong way. To come about value with the personal condition of the seller is to come about it in the wrong way. To view value through an uncloudy lens that accurately and sharply contrasts the subject offering with its neighboring comparable is the only way we should be measuring and predicting value. All other methods of determining price are bogus.

The range of similarities can be vast, but certain aspects of a property can impact value in a relatively subjective way. This is the case when we are comparing a property that sold in the Lake Geneva Highlands to one that sold in Cedar Point Park. It should be no secret that these two theoretical sales are similar, but rather different simply because Cedar Point is a more desirable location than is the Highlands. This is a subjective statement, imbued with all sorts of personal preference, but if we look back over the years and compare the sales one to one the statement holds buckets and buckets of factual water. But if the two homes are side by side in the Highlands, and one is worth $1.25MM and the other is the same, shouldn’t we be smart enough to assume the thing that is the same is equal to the $1.25MM price? The fact that one seller is willing to accept a market and the neighbor is not might void a possible sale but that decision does not, in any way, change the value of that property.

Likewise, if a property sells for $3.2MM and the neighboring home is in both a better location, and of a superior design, we can agree that the superior design portion of that is subjective, and once again open to personal preference, but we cannot dispute the value of a superior location. If the $3.2MM home was one home from the water and the neighboring home that we seek to value is one home closer, and therefore on the water, who could ever make a rational argument that would find the off-water home equal to, or perhaps even more valuable than the on-water home? People who continue to believe that real estate is entirely subjective, open to the whims of a buyer and those of a seller, instead of understanding these overly simple, key aspects of pricing and value determination.

Photo by Michael Moore Photography.