Now What’s My Land Worth?

I’m going to go out on a limb here and define some specific points that we at Guys In The Zone use to evaluate a property.  At the moment, this practice tends towards the black arts since the basis for land values in the zone went right off the cliff with the rest of the world’s economy.

Jesse over at Green Leaf Real Estate has come up with a rather interesting formula for property evaluation:  take what was paid for the land and add 25% annually, and then reduce that number by 40% to get today’s market price.  I find this technique to be ingenious, not so much for it’s accuracy, (that would be a subject of much debate), but due to the fact that Jesse actually came up with a method for evaluating land that sounds like it’ll put you somewhere in the ballpark.

The problem is, we’re not sure where the ballpark is these days.

Rod & I have been working more with the other real estate agencies in The Zone as we move towards a more cooperative real estate profession.  John Wieland of Coldwell Banker invited us out to look at a couple of houses in Ojochal and we got to listen to how he addressed the question “what’s my house worth?”.  He answered: “you can follow the market, be right at the market, or lead the market”.  To “follow the market” would be to realize that others have dropped their price and so you follow suit.  “Be at the market” would be to stay in the trajectory, up or down, that you feel the market is in.  Now, to “lead the market” means that you anticipate the market and blaze a trail with new prices that are compelling to the type of buyers that we now are seeing here in the zone.  In today’s “down” market, this means doing extraordinarily low pricing to get a timely sale.

The Problem:

The old market abandoned us. It had its annual upward trajectory, and its peak, and then it simply went away, leaving us standing here, doe eyed, wondering what the heck to do next. How does one evaluate a property when there is no comparable value in an entirely restructured world?

I went to an open house showing of the Casa La Big Sur property in Escaleras the other day.  What an amazing house!  $2,700,000 and it’s yours.  While I was there I had the rather novel thought hit me that the house was worth every penny and that the world market would very likely agree.  The problem here in Costa Rica’s southern Pacific zone is that we have to go out into the world market to get our comps for such a property.  The luxury house market is in its infancy.  There have been a couple of over $1,000,000 house sales, but at this point, these sales are a flimsy basis for any sort of market in Costa Rica’s southern pacific zone.

Perhaps that is what happens in fledgling market places, they start off with just a few maverick buyers that know the value of a thing just by looking at it.  The rest of us come along later, looking for all the necessary data & comparables to help us to determine if the thing has value or not.

Most sellers have a number in mind of what their property is worth.  We are well served to ask – what else can be had for that price?  In asking this question, we actually are able to defy some evaluation rules, such as, “Don’t use asking prices as comparables.  Only use completed sales”. Well, what if asking prices are all you’ve got since the market went away?  What if in a given area, there hasn’t been a sale in over a year and during that year the world’s economy got flushed, what do you do then?

Converse.

The Guys In The Zone Method:

Here at Guys In The Zone we’ve adopted the “Conversation” method.  Rod & I stand, (or sit – depending) on a property and discuss its virtues & hits.

Here is a rough criteria of property virtues we consider:

  1. View
  2. Access
  3. Amount of land
  4. Amount of usable land
  5. Privacy
  6. Services – road, water, electric
  7. Air flow
  8. Distance from highway
  9. Who the developer was/is
  10. Overall “feel” of the property – how nice is it?
  11. Neighborhood

To this we apply the filters:

  • “what else can you get for that price”? and,
  • “where are you at Mr. Seller? (desperate / somewhat motivated / can wait)

Now we’ve likely got our land value, based on a historical understanding of how property used to be valued in the market place, and understanding that the property currently has an inherent value.

Evaluating Houses:

Once we’ve got our land value established, we consider the cost to build the house. This is relatively easy to do since to build a house now is running arguably around $85.00 per foot, largely depending on the finishes.  At this level you’ll have some granite tops and reasonably nice lighting and plumbing fixtures.  Pool & landscaping not included.  You can move your price per foot up or down now based on how elaborate or basic your design and finishes are.

If you take the cost of the raw land, the cost of building the house, then add the “hassle fee”, you’ll arrive at a place to start.  How much, in addition to the hard costs you just calculated, will a buyer be willing to pay you so that they don’t have to go out and build a house on their own?  There is no formula to this number, so this is the portion of the selling price that can be toyed with.

With a  list price number in mind, you can now “follow the market, be right at market, or lead the market”.

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