Waterfront Property: How is Value Determined?
At the most basic level, the value of property, including waterfront property, is the price the market will bear. If you are considering purchasing (or selling) waterfront property, you need to read this article.
When neither the buyer nor the seller are distressed (facing foreclosure or other undue financial pressure), and the property has received normal market exposure, the price they agree on should be a reasonable reflection of Fair Market Value of the property.
If Only Finding the Right Price Were That Simple
Before this event can happen (buyer and seller coming together under contract), someone has to determine the listing price of the home, i.e. the price at which the home will be offered for sale.
For waterfront property (lake front property, beach front property), some of the factors that influence pricing are:
- Waterfront footage
- Access to the water (for people, for boats)
- Storage, docks/slips for boats
- Location on the body of water (for example, in a cove where the water might dry up in a drought)
- Guest accommodations
- Condition of the septic system, or access to city sewer
In addition to someone figuring out a reasonable listing price for the property, the buyer side of the transaction also has to come up with what they think is a fair price, or the price they are willing to pay for the property. The seller side of the transaction is usually a Realtor working with the owners to determine pricing, or a Realtor using their own analysis (Competitive Market Analysis, or CMA) along with a certified residential appraisal.
Appraising Lakefront and Waterfront Properties
Over the years I have appraised many types of properties including vacant land, large acreage, ranches, subdivision homes, condominiums, small income properties and others.
However to this day I believe that lakefront or water front properties tend to be some of the most challenging assignments.
The challenge however lays mostly in the location. The farther out and the more undeveloped the submarket is, the more challenging the assignment. Take Point Venture for instance. This community is very far out there in the northern shore of Lake Travis, approximately 22 miles northwest of downtown Austin (which could also turn into a long commute). This particular submarket tends to bring more of the vacationer types, therefore, the market tends to be a little slower and marketing times tend to be longer, thus, making the availability of comparable sales pretty limited.
Appraisers rely heavily on comparable sales to determine the value of property, as part of the Sales Comparison Approach. Comparable sales are properties that share similar characteristics with the subject property that have recently sold. (“Recently” should be 6 months or less, but sometime it is necessary to look further back in time).
Finding and Analyzing Comparable Properties
This is where the challenge begins and it’s where you (or the appraiser!) really need to put your thinking hat on.
Early steps in the appraisal:
- Determine the availability of comparable sales over six months, twelve months and sometimes a little longer.
- Analyze the active listings and any pending sales.
- Look for the best ones, the ones that are actually the most similar to the subject.
- Consider the subject’s view.
- Determine the actual lake frontage and whether or not it is in a cove where the dry season would really affect value (believe it or not).
- Assess the availability of floating docks, lifts and so on.
These are things to consider – there are good reasons why people pay top dollar for these type of dwellings (the boating enthusiasts, the entertainers).
Do you think you could figure the value of these items?
A Quick Peek at a Matched Pair Analysis
One of the widely taught appraisal theories, the matched pair analysis works something like this (in the perfect world of course).
See the example below:
At this point, you’ve guessed it right if you guessed that the view adjustment would most likely be $20,000. Only if it were that easy.
You get the idea, but, of course in the real world it gets a lot more complicated than this.
Consider this example of three (theoretical) waterfront properties that recently sold:
So now, we’re getting a little closer to the reality of the complexity of appraising lakefront property.
In this particular example you can see that there are many factors to consider such as: the lakefront location, whether the property is in a cove or not, the actual size of the dwelling, whether there’s a dock or boat slip or not, pool or no pool, guest house or not, and last but not least, the lot size. Now try and guess the adjustments.
This time it gets a lot more complicated, now we get to do a more in depth analysis, so we start looking for other properties that are similar to the ones above and try to extract the dollar figures for those differences and come up with the adjustments.
This is only the beginning. Other things that we must consider include condition, quality, design, upgrades, updates, construction materials and the list goes on.
If you’re considering selling or buying lakefront property, consider getting a professional appraisal (from us, if you’re in Central Texas – the Greater Austin Area) so that you understand the factors that contribute to the value of the property, from the open market standpoint, which is also what a lender’s appraisal will consider as well.