Valuing Lakefront Property

1. Valuing Lakefront Property Beth L. Graham, ePro TRC PMN Certified Residential Appraiser

2. Classroom Guidelines • Please turn cell phones on silent • Approved for 2 hours of real estate and appraisal continuing education (Michigan) • Must stay until the end of session to receive credit • Instructor contact info: beth@bgappraise.com (517) 394-4583

3. Valuing Lakefront/Waterfront • Learning Focus: • Why is waterfront so difficult to value? • Lakeshore Characteristics – Identification • Waterfront Right, Setbacks & Zoning • Waterfront Problem Solving Techniques

4. Why is Waterfront so difficult to value? • A. Five Unique Characteristics in Waterfront properties: • 1. Land is the primary motive • 2. Purchases are emotional events • 3. Rising land value can quickly shorten the life of the dwelling • 4. Greater market tolerance for functional/external drawbacks • 5. Waterfront is more highly regulated than other properties

5. B. Six Classic Waterfront Valuation Errors • 1. Overweighting shoreline value • Principle of Balance • Principle of contribution • Principle of increasing & decreasing returns

6. WATER 100’ 50’ Both Buying View and Access Same Views More ability to add-on, more parking Higher taxes, more shoreline expense. STREET

7. Misinterpreting Waterfront Market Events Waterfront Puzzler No. 1 I just got back from doing a preliminary inspection of a lake property. The owner recently bought the property for $800,000, but the sale included a one-story dwelling of 2,500 square feet and it was in good condition. After the sale, the owner demolished the home at a cost of $25,000. Based on this information, I’m not sure how I should value the site in the light of this sale. Got any ideas? • Contributory Value of the existing improvements • Expenditures made immediately after purchase • If minimum improvements: $800,000 • Sale price may already reflect the demo cost • The $800,000 price may already reflect the vacant site value.

8. Misinterpreting Waterfront Market Events(Cont) Waterfront Puzzler No. 1 I just got back from doing a preliminary inspection of a lake property. The owner recently bought the property for $800,000, but the sale included a one-story dwelling of 2,500 square feet and it was in good condition. After the sale, the owner demolished the home at a cost of $25,000. Based on this information, I’m not sure how I should value the site in the light of this sale. Got any ideas? For example: • $800,000 price- $200,000 (house)---------------------------------- • $600,000 Land Value

9. B. Six Classic Waterfront Valuation Errors • 3. Sales are often complex • 4. Faulty adjustments for location, site & view • – doubling up on adjustments, make one adjustment to cover all three – which should be the entire land value. • 5. Segmenting value to portions of the site • 6. Overlooking the application of appraisal principles – change; anticipation; supply & demand; highest & best use • Getting away from price/front foot & going to price/sq. ft.

10. C. Valuing Waterfront Sites • Sales Comparison a. Most common & preferred method for valuing land b. Sales of similar land parcels or sites are analyzed, compared, & adjusted to the subject property c. Adjustments are derived from market sales using paired data analysis or other methods to identify units of comparison. d. Typical units of comparison are – - Price per square foot or per acre - Price per lake foot e. Surplus shoreline and/or surplus land should be identified & compared (preferably) to other sale properties with surplus land. The normal approach is to determine the land and/or shoreline that is surplus and then discount its price component compared to the primary land portion.

11. 2. Extraction • a. Used when there are few recent land sales available in the market area. In this valuation procedure comparable sales of improved properties are utilized. • b. Land value is derived by extracting the existing improvements from the sale price of the comparable property. First step is to the estimate the cost new of improvements. Second step is to estimate the depreciation & subtract that from the current cost. The final step is to deduct the depreciated cost of the existing improvements from the sale price to derived the residual site value for the comparable sale.

12. 2. Extraction Waterfront Puzzler No. 3 I’m appraising a site with 115 feet on the lake. The property is located in an area that has no vacant land sales. I analyzed six lakeshores properties and extracted their land values. How do I analyze the data and adjust it to find the subject’s site value? If the subject is comparable to the above sites and has 115 Feet of shoreline then : $1850 (price per Lake Foot) X 115 ( Total Feet) $212,950 (Indicated Value)

13. 3. Allocation • a. Based on the principles of balance & contribution. • b. Appraiser uses a ratio of land value to total property value derived from sales or extracted data, or even assessor’s data. The ratio is then applied to the appraised property (i.e., 1:4 ratio = 25% attributable to the site value). • c. Generally not applicable to residential waterfront valuation, but can be used as a secondary crosscheck procedure.

14. Lakeshore Characteristics – identification guide • A. Lakes with full recreational privileges • 1. Rear shoreline with direct access & views • a. House orientation (actual front of the house) might not matter • b. Greater value when more rooms have lake views • 2. Restrained waterfront access • a. Traffic on the street plays a key role • b. Sometimes there are two legal entities and the appraiser must consider whether they are contiguous • c. In some cases the value is in the lake view & the value of the actual access to the waterfront is diminished to some extent. (use property for view only)

15. Lakeshore characteristics • 3. Primary shoreline at rear with secondary across the street • a. Often considered less desirable than no. 1, but more desirable than no. 2 • b. The site appears more open & may afford less privacy. • 4. Commons at the shoreline • a. Same as No. 1 except that lakeshore frontage is commonly owned – often by the municipality • b. Looking at the site or neighborhood usually does not reveal the presence of lakeshore commons. • c. The controlling interest in the commons typically places restrictions (or some sort of control) on the use of the shoreline. This is deemed in the public’s interest & can be positive or negative to the waterfront owners abutting the commons.

16. Lakes with full recreational privileges (cont.) • 5. Deeded Waterfront Access • a. Greater value for unobstructed views & proximate access • b. If a golf cart comes with the property so the owner can drive to the boat slip – that’s not good! A short walk (with the shoreline clearly visible from the property) is ideal for marketability. • c. Often involves a homeowners assoc. & yearly dues

17. Lakes with full recreational privileges (cont.) • 6. Channel or Lagoon Access a. Check the depth of the channel & the frequency of dredging or the need to clear a path to open water b. Some channel or lagoons can be nearly as valuable as normal lakeshore frontage due to wind protection and calm waters. But there is no substitute for expansive open water views.

18. Lakes with full recreational privileges (cont.) • 7. Seasonal Waterfront • a. In some cases the municipality or controlling agency might restrict properties for seasonal use limit occupancy to specified number of months per year (e.g., island properties). • b. Never mix seasonal lakeshore with properties that have normal year-round use of the lakeshore. • c. If there are cabins on the lake, carefully check for seasonal use & what the municipal ordinances require.

19. B. Lakes with Limited Recreational Privileges • 1. View only lakes • 2. Shallow Lakes (large ponds, fishing, etc.) • a. These lakes are treated primarily as a view amenity. The value can increase significantly if the lake or street (on which it resides) has certain prestige value. • b. Appraisers can look at the lakeshore in the same way they would at a pond or wetlands area. The view is driving the price. • c. In the case of the “view” lakes it is very important to select comparable sales located on the same lake or one that shares similar prestige and amenities.

20. c. Positive & Negative Lakeshore Characteristics • The health of the lake is a very important issue to lakeshore buyers. If the lake is green with algae or has a stench in August – buyers might lose interest. • 1.Lakeshore positives • a. Naturally sandy shoreline • b. Riprap in place to restrain erosion (seawall) • c. Elevated, with modest slope to shoreline

21. c. Positive & Negative Lakeshore Characteristics • 2. Lakeshore negatives • a. Non-native weeds • b. Zebra mussels • c. Steep access to shoreline • d. Marshy or swampy shoreline • e. Algae and low water clarity

22. D. Lake Speak – Defining the Terms • 1. Water rights • a. Littoral Rights • These are rights pertaining to properties abutting a lake or pond (i.e., non-flowing waters) with an emphasis on the use & enjoyment of the shore (the area between high & low water levels) • b. Riparian Rights • These are rights pertaining to properties touching a river or stream (i.e., flowing waters) with an emphasis on the benefit & useful purpose to which the flowing water may be applied.

23. D. Lake Speak – Defining the Terms • c. Navigable Water • These waterways are owned & controlled by federal or state govt. Adjoining property owners only own the land above the mean high water mark. The public has the right ot use the waterways for transportation & recreational purposes. • d. Non-Navigable Waters • In lakeshore properties this is referred to as a meandering lake. The adjoining property owners typically own the submerged land to the center of the lake or stream. • e. Meandered Lake. A body of water except streams located within the meander lines shown on plants made by the United States General Land Office.

24. D. Lake Speak – Defining the Terms • f. Ordinary high water level. • Boundary of waterbasins, watercourses, public waters & public waters wetland, and: • the elevation delineating the highest water that has been maintained for a sufficient period where the national vegetation changes from predominantly aquatic to predominantly terrestrial. • For watercourses, the OHW level is the elevation of the top of the bank of the channel; and • For reservoirs and flowages, the OHW level is the operating elevation of the normal summer pool.

25. D. Lake Speak – Defining the Terms • g. Waterbasin. • An enclosed national depression with definable banks, capable of containing water, that may be partly filled with waters of the state and is discernable on aerial photograghs • h. Watershed. • Each state designates major watershed units delineated by a map.

26. Waterfront Rights, Setbacks, & Zoning • A. Lakeshore setbacks and zoning • 1. Shoreline minimum standards • a. Defined between sewered and unsewered. • b. Often set up by the class of lake. • Natural environmental lake – less that 15 feet deep & less than three dwellings per mile of shoreline • Recreational developed lake – more than 15 feet deep with 3 to 25 dwellings per mile of shoreline • General Developed lake – more than 15 feet deep with 25 dwellings per mile of shoreline

27. Waterfront Rights, Setbacks, & Zoning • 2. Setback determinants • a. Lot Width • b. Lot Area • c. Structure Setback • d. Shore and bluff impact zones • B. Hard Coverage Issues • 1. Houses, porches and decks • 2. Driveways, walkways and some easements • 3. Rock landscaped areas

28. Waterfront Problem Solving Techniques • A. Typical Waterfront Valuation • 1. Price per lake foot or per square foot • 2. Use comparable sales or extraction techniques • 3. Downplay functional/external • 4. Compare location, view and access • B. Seasonal Use (Cabins) and Island Properties • 1. Only compare seasonal to seasonal • 2. Access is a primary issue • 3. Utility requirements, vandalism

29. Waterfront Problem Solving Techniques • C. Deeded Access and Channel Access • 1. Water Access & Views (if any) • 2. Depth of the Channel • 3. HOA, dock (boat slip) permits • D. Potential Tear-Down Situations • 1. The site is the issue • 2. Deduct improvements from the selling price • 3. Identify tear-down trends • 4. False assumptions might influence the market

30. Waterfront Problem Solving Techniques • E. Valuation of Vacant Sites • 1. What will be the views from the proposed structure? (2nd floor view?) • 2. Consider natural bluff setbacks & any restrictions on the removal of vegetation • 3. What about prior improvements on the site? (are they legal)

31. Waterfront Problem Solving Techniques • F. Small Residence on a waterfront site • 1. Setbacks might limit renovation • 2. Complete demolition might not be permitted • G. High-value Waterfront Properties • 1. Showplace vs. privacy • 2. Curb appeal (if visible) and the “estate-like” setting • 3. Panoramic views • 4. It’s all about location, location, location

32. Helpful websites • Subdivision plats: • http://www.dleg.state.mi.us/platmaps/sr_subs.asp • Michigan Lakes: • http://www.michigan.gov/dnr/ • MSN– maps http://www.bing.com/maps/default.aspx?FORM=MSNNAVV

34. Closing gifts for Cottage buyers • MAP with directions to new cottage – print copy & email version with your name & contact info on the bottom for future sales • Lake Rake for pesty weeds • Area info for repairs, garbage pickup, lake rules, association info., etc.