The first question you are likely to ask after you first consider buying or selling a property on Roatan is: “What is your Roatan property worth?” As a buyer, you don’t want to pay more, and as a seller, you don’t want to be paid less.
This sounds like a simple question, and the average real estate broker or agent is likely to provide a quick and confident answer. (For simplicity, I will call both licensed brokers and agents real estate professionals, or “REPs.”) This article will tell you some insider secrets as to: (1) why the answer to the question of worth, especially on Roatan, is as much or more strategic than it is factual, (2) what you ought to have in mind before you consult a REP, and (3) what questions you need to ask before you agree to a price.
The basic principle of value is that a property is worth “what an un-pressured, knowledgeable, and willing buyer would (most likely) pay to an un-pressured knowledgeable, willing, seller.”
The statement: “This house is worth $250,000” resembles a factual statement, like: “This house is white.” But the statement about value is instead a prediction about what a so-far unidentified future buyer will do.
Please notice that this definition warns that a value estimate can be distorted if the buyer or seller is ignorant, not serious, or under pressure. This rings true on Roatan, where for example islanders have been taken advantage of by opportunists who offer them small sums or even used vehicles, for lands that were in their families for generations. And as for willing sellers, a common saying on the island is: “Every property on Roatan is for sale – at a (high enough) price.” With our goal of an accurate prediction in mind, let’s turn to traditional methods used to create one.
Traditionally used the first way that REPs try to look into the future is to look at the past (like the proverbial “bird who flies backward to see where it’s been”). We look up local sales of what appear to be similar properties (comparable properties, nicknamed “comps”), then we apply the past sales prices to the present property, adjusting up or down to account for differences in size, condition, amenities, the desirability of the neighborhood, any recent changes in the market, and anything else relating to value.
The virtue of looking back at the past is that at least it is factual. But in Roatan, the circumstances of individual sales can be hard to evaluate. In addition, anchoring an estimate in the past carries the danger of getting stuck in the past and missing local, regional and world trends.
On Roatan, looking at comparable sales is especially prone to error because we have a fairly “thin” market, importantly based on visiting clients. That market declined sharply in 2008, stayed low during the Great Recession, and has been slowly recovering, starting with lower-priced properties. For that reason, too often the recent “comparable” sale price was based on the seller not being able to wait any longer and the island being scoured by “bottom fishers.”
One recent sale, for example, was of a lovely Balinese themed home in a community by the sea, where the owner of many years was now in his mid-80s and sickly, with his children pressing him to move back to the U.S. for medical care and to liquidate his assets. He ended up selling his home for under 50% of what it would sell for two years later. By doing that, he established a depressed and false comp among REPs who did not know the seller and that he was definitely not “willing, and un-pressured.”
Another example of problems with this method is that Roatan features large and expensive homes fairly close to modest and humble ones. The difficulty of using this property either as a “comp” for the other is that they are selling in completely different markets.
Similarly, in areas such as West Bay, it is common to use condo prices as comps for homes. One problem with this is that the value of a structure depreciates, while land value does not. This basic truth is distorted on Roatan, where land has historically been inexpensive, while many building materials are costly and need to be imported in. Also, long-term market inflation has obscured and confused the distinction between the value of the land and the value of the structure. Eventually, this will show on resale and such comps will be increasingly questionable.
Finally, unlike shares of stock, which are all identical, every piece of real estate is unique. This is especially true on Roatan, where a few yards make a difference and may affect whether you catch the local breeze or the best view of the waves breaking on the reef. How valuable that may be to a given buyer is also subjective.
Though it takes a study to completely understand what a given “comp” teaches, it is at least rooted in fact. And it affects (often too much) what a buyer’s REP will advise. “Comps” can be self-fulfilling prophesies. So yes, start with them, but beware that this method has major subjective elements and is prone to error when extended carelessly into the future.
This method asks how much it would cost to rebuild the structure, then subtracts depreciation of the old structure and adds an estimate of the land value. Therefore, if average construction costs of a building of a certain quality would be $200 per square foot, the rough replacement value, before depreciation, of a 2,000 square foot house would be $400,000.
The problem with this method is that it leaves up in the air the value of the land. And land value is all three of the famous three first principles of real estate value, which are “location, location, location”. An appraisal done through replacement cost is only half done.
Just as comparable sales are rooted in the past, the replacement value is rooted in the present. While they provide helpful facts, they do not determine the future
Typically only used for commercial and investment properties this method asks how much income property is bringing in, then places its value at some multiple of that (the “capitalization rate”). Obviously, this method is useless for residential properties, or even for commercial properties without a profitable business on them, because the value of such properties would then be zero.
As you have seen, the two methods of establishing the value of a property are in part subjective and are always uncertain, especially on Roatan. They may be better predictors of a future sale price than tea leaves, but they leave out critical considerations that affect the future price. So after riding them as far as they will take you, what should you consider next?
If you absolutely had to sell a property tomorrow in a “fire sale” or auction, you know that you would likely not be paid as much as if the property were instead intelligently marketed. The same is true over moderately long periods of time. The longer a property is on the market, the more likely it is to come to the attention of an interested and qualified buyer. Marketing is a numbers game.
Of course, there is a downside of pricing a home too aggressively and waiting for the market to come to you. The property can grow stale on the market and lose the “buzz” that is important to a marketing campaign. And you may be establishing yourself as someone not really interested in selling at all, which will also discourage a REP from investing in marketing the property.
As a general principle, there is a “sweet spot” just below the best estimate of market value, which will move the property in a reasonable time at a reasonable price.
Thirty years ago, Roatan was known mostly as a budget diving destination. It was and still is, among the last of the Caribbean tropical islands to develop. If you wanted to sell a $500,000 house in 1999, good luck talking to a young backpacker staying at a $10 room in West End.
Roatan has since changed a lot. We now have three cruise ship ports, an expanded airport, multiple supermarkets and gas stations, and development everywhere. But reputation always lags behind facts and buyers have changed a lot. When we arrived in 2003, many of the backpackers had left, but a mainstay of the market was a tourist who was able to get a second mortgage back home. The financial crisis and the Great Recession have altered that profile.
So your buyer may right now be working with a REP in Aruba or St. John, unaware that he can pay far less for a comparable property in Roatan. The question is: How are you going to tell him that your property exists?
The answer is a REP who is in touch with the regional and world markets and is willing to invest in finding the buyer to whom your price is a bargain. And you need a REP who is aware not only of past sales but of current trends; who knows that your sale will occur in the future, and the future can be molded.
The answer to what a property is worth is a moving target, importantly influenced by a REP who is willing to develop a profile of your most likely buyers and to spend on marketing to find that buyer to whom it is worth that price.
Most REPs try to be ethical and honest in recommending sales prices. But both buyers and sellers should be aware that their REPs’ interests are not identical to theirs.
If you are a prospective buyer, your REP is obliged to try to get you the property at the lowest price. But the REP is compensated for this effort with a percentage of the sales price. So your incomplete success benefits the REP. Likewise, it is legal in Roatan for the REP to represent both the buyer and the seller. Obviously, the interests of the buyer and the seller on setting the price are the opposite.
As another example, if you are a prospective seller, the REP’s first interest is in getting the listing. That done, the REP will share a commission even if the REP does no marketing beyond posting to one of the multiple listing services, waiting until another REP brings in the buyer. So a REP has to resist a bias against marketing – spending a known quantity to increase by an unknown quantity the likelihood and amount of the sale. You, on the other hand, have an interest in the REP marketing your property to the widest exposure possible.
Yet another example is where the seller’s REP receives competing offers, and one of those prospective buyers is also a client of the REP. The REP would make double the commission if the sale went to the REP’s client.
As a final example, sellers like to list with REPs who tell them that their home is “worth” a high price. So it takes courage to disagree with an owner on that subject. But once the house is listed, the incentives change. The REP will only be compensated if the property sells, and offers may look better to a REP who needs a quick commission, even if the owner is willing to be patient.
None of this is a criticism of REPs. These conflicts of interest are built into the system and are not character flaws. Biases may not even be conscious.
They are far from overtly abusive behavior, such as REPs saying that they “have a buyer” for the property in order to get a listing, only to later report that the buyer has “changed his mind.” (Look at promises skeptically. If the REP is arguing for a listing based on having a buyer, he/she should accept a listing limited to that buyer.)
None of these conflicts of interest necessarily affect the sales price. But they can. For example, in one case a seller’s REP who had two bids (on one property,) one of which was from a buyer who was not the REP’s client, did not present the seller with the outside bid, reasoning that it was lower, instead of setting up a “bidding war” which would have potentially driven the asking price higher.
The best you can do is to find a REP who is clearly looking to keep clients for the long term, who wants to educate you and not just process you, who is recommended by those whom you trust, and who appears to be successful enough personally not to be moved by financial conflicts of interest. Ask that REP to be specific about how the sales price was developed, and exactly what is the marketing plan.
Owners have a tendency to be influenced by factors the market cares little about. The most common is what the owner paid for the property. While your recent purchase of a finished home may be a good comparable, an owner who paid too much to build a home may not be rewarded. The market does not care what you paid.
Likewise, technologies that the owner installed, like wired-in intercoms, may have become obsolete. Or the market may not want to pay full price for a self-opening toilet. The unpredictability of how the market will respond to renovations suggests that they be made sparingly for the purpose of selling. Keep the price lower and let the buyer make the changes. (Interior décor and landscaping, by contrast, are often profitable improvements.)
Another bias is that, particularly in close-knit communities like those on Roatan, owners may feel social pressure to give their listing to a friend who has a license, regardless of whether the friend is the best positioned to market and get the highest price for the property. But as pointed out above, the choice of a REP has many consequences. This is an important business decision that affects your family’s future, and you need to treat it like one. Your friend does.
A final bias of owners is over-optimism. Sellers hate the idea of pricing the property too low, knowing they cannot later go up unless there is a “bidding war.” And they tend to compensate by starting at an over-optimistic high price, thinking they can then incrementally lower it. This is a recipe for a property going stale on the market. A property should be priced to sell.
As you have seen, what a property is “worth” is not a fact, it is a prediction. To be accurate and not just a self-fulfilling prophesy, setting a sales price requires bringing together a mix of history, forecasting, strategy, and intuition. It requires understanding the needs and interests of the parties and the local and larger markets. Setting a value is a deeply strategic task, whose accuracy will then depend on the ability and determination of the REP to make it happen. If you would like a no-obligation consultation about what your home is worth, or advice on what you can buy on Roatan at your price point, call me at +(504) 9836-8630 or send an e-mail to Anna@LuxRoatanRealEstate.com.