The New Math

The New Math

The New Math

It used to be well known that the math preferred by the Lake Geneva lakefront market was two plus two equals four. That formula supposes that land would cost two million and a newly constructed house would cost two million and the end result would be a brand new home at a cost of four million dollars. The market used to love this math, or at least some close variable of it. Two plus two was common, as was two plus three, and to a lesser extent, three plus three. Looking back, those were some mighty fine days. Back then, things made sense. The market played by the rules.

What was known back then was that you wouldn’t want to deploy that math on a lot that wouldn’t support the sum. There were roads that could hold valuations between four and six million, and there were other roads that could not. A note of importance: most roads could not. Renovations took a similar approach to this final valuation, as buyers would buy something for two million, put $500k into a renovation, and feel reasonably content that they could sell for some number marginally higher than the investment. Further up the market, buyers would also buy in the three million range and put whopping renovations on top of that purchase, settling around four million when the last nail was bent. Most of these market moves had one thing in common: they respected the market and sought to keep the total investment in line with some semblance of future market value. What a cute idea.

The new math that 2019 and 2020 have adopted doesn’t care much for this old math. The new math says that if the market can support significant liquidity in the $5-12M range, and if inventory is tighter than tight, then any sort of investment that finds a buyer all in around ten or less is a good one. The new math doesn’t care about location. It might pretend to, but I assure you it doesn’t. The new math supposes that a $1.2M lot plus a $2M new house is worth $4M. The new math looks at the properties as if they are in a vacuum, not attached in any way to their adjacent properties. The new math looks down the lake a ways and finds a home that is selling for $6M and thinks it, too, should be worth $6M. The new math still thinks about how much the land costs and how much the house costs, but it misses the mark on what the final product is worth. But this mistake isn’t really a mistake just yet, because the heat of the market is rounding out this typically egregious error.

At the top end of our market, the math has also changed significantly. Times were, if you wanted to build a magnificent lakefront home on Geneva you would do so out of love of this place, but rarely would you do so while thinking your expensive build was a good financial investment. In the early 1990s, when the top end of our market was selling in the $3-4M range, owners were building $6M homes. They never expected to recoup their investment, rather they approached the spend as though it were indeed solely an investment in enjoyment and personal fulfillment. They built these homes to bring their family together, to find respite from work, to indulge in tangible luxury. This was largely the case into 2016, when the market at the top end changed.

That was the year I sold the Michael Abraham on Pebble Point for $9.95M. And then the ground floor unit at Stone Manor for just under $6M. And then 1014 S Lakeshore in Fontana for $7.35M. The market at the top end had been simmering for a few years, but in 2016 it finally reached a boil. That market continued to hum from that year until this one, and in the mean time we’ve printed several more deals between $7M and $12M. The market at the top end changed from one where we’d historically sell one home north of $4.5M annually into one where we can easily expect to sell 5 or more homes north of $5M annually. What this has done to the upper bracket new construction is obvious. The market no longer views an all-in cost of $10-15M as purely a personal investment. The market views it as something that will likely be liquid in the end, and that belief has fueled a rush of new homes that will find the buyers sitting on total investments in the $10-15M range.

What does this all mean? Well, unless a property is somehow unrivaled in the market, I believe most buyers in the sub $10M range should still approach the market with some understanding of that old math. That’s because the new math doesn’t require any understanding, it just requires motivation.

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