Appraisal in Abaco, The Bahamas

The appraisal was for refinancing purposes, but the subject property was the largest on a cay with only 110 homes, a substantial number being second homes for wealthy foreigners. This was the former residential estate of a well-known American commercial family dynasty.

Complicating the situation is that 37 of these homes on this cay are currently listed for sale. Just as elsewhere in the Caribbean and Latin America, the supply of vacation homes for sale is currently greater than demand.

Also complicating the valuation was the high value of land as well as the high cost of construction in the Bahamas, which forces an appraiser to segregate each home sale into components of land value and improvement value. On the continental mainland, the abundance of land makes land values cheap, but on a cay which measures about 2 kilometers by 100 meters and is surrounded by the sea, the constrained land supply makes land much more valuable, similar to Manhattan and San Francisco, where natural barriers also constrain the supply of land, making real estate more expensive.

Likewise, labor and materials are usually brought in from other islands and sometimes other countries, such as Haiti, adding to construction costs in the Bahamas.

Rather than using a normal adjustment grid, I performed a multiple regression analysis based on nine sales. From a statistical point of view, the sample size is not good, but still better than the classical adjustment grid method of valuation. The two variables which proved to be statistically significant were land area and finished living area, and I also tested variables for lineal feet of beachfront, number of docks, number of bedrooms, and a dummy variable for presence of a protected harbor (useful during hurricane season).

For this particular cay, for instance, the coefficient for land value was shown to be $745,286 per acre, while the local appraiser had already been using $750,000 per acre in his adjustment grid. The results were remarkably similar.

PS:  A $5,170,000 loan was subsequently made by Kennedy Funding of Englewood Cliffs, New Jersey.

Appraisal of a residential subdivision in Trinidad

 

The story was as follows:  A bank was about to foreclose on this struggling hillside subdivision with upscale hopes, although the developer had received “Town and Country Planning permission” (entitlements) for a change to multifamily development, which might appeal to a broader market than these expensive residential lots (each > $100,000 USD, pricy even by U.S. standards). 

 

The developer had a recent valuation from an MRICS chartered surveyor for $7,225,000 for a slice of land having a total of 11 lots plus roadways, including two lots required to serve as open space and a preschool/community center.  The appraised value worked out to about $14 USD per square foot for total land area before subdivision. Numerous residential lots are listed for sale in the neighborhood at prices of about $14 to $15 USD per square foot, so the chartered surveyor did not discount for the time and expense to sell out all of the lots, as required in U.S. appraisals -- these lots won’t fly off the shelf on Day One of marketing.  In fact, there have been no lot sales this year.

 

As with many other Caribbean and Latin American nations, developers here have crowded the residential submarket catering to the affluent class, which during better times has higher profit margins than land developed for affordable housing.  The result has been similar in each nation – a dearth of affordable housing for the masses but an oversupply of upscale residential projects – as each nation competes to attract North American and European millionaires.

 

Two lot resales occurred in this subdivision last year, at prices of $4.30 and $11.84 per square foot for lots of differing sizes. The buyer of those lots is now selling all holdings in this subdivision, though.  Part of the problem for developers is the very slow response time of the Trinidad and Tobago government in granting building permits.  Developers all over Trinidad and Tobago have been complaining about this.

 

In this case, the purported Town and Country Planning Grant of Permission document for rezoning to multifamily use turned out to be for a different site and a different owner, with the document truncated before it even explained the approved new land use.  The developer did not provide any documented approvals nor plans and specifications for the proposed townhouse development, which would have been required to obtain Town and Country Planning permission.

 

Just as last week in Scotland, this borrower assumed that a foreign appraiser would not check names on documents and would become overly reliant on a local appraiser who is hired only as an advocate.  This particular appraiser also scoffed at my decision to visit the Land Registry office to find comps, but he left me with no choice; his report had no comps or market data or analysis.  I found comps, and a lower value was indicated.

 

 

Appraisal in St. Maarten

The property was a 20-acre hillside, ocean view parcel, improved with a 10,000 square foot home. The top half was zoned for conservation only, but the bottom half had an approved subdivision plan allowing 1200 square meter (13,000 square foot) lots. There were picturesque views of a bay and yacht harbor.

The home had been built in the 1970s and still had a few, dated design features from that time period, such as mirrored ceilings and flagstone facades, but was being renovated in preparation for the winter rental season, when it typically rents for $5500 per week. It had just received a new roof, kitchen and air conditioning units.

The buyer had not disclosed that the he was also the real estate broker who had listed the combined property for sale for the last 4 years at a price of $15 million. (Nothing else in the area had sold in the last 4 years, either.) The buyer offered $5 million, and the offer was accepted. Based on a cost approach and an income approach (based on weekly vacation rental rates) plus an estimate of value for unimproved, hillside land with ocean views, I validated the $5 million offer to be at market value.

Ordinarily, a scenario like this would result in a funded loan, but the buyer hired his own local appraiser to appraise the property for $36 million, and was intent on requesting an $18 million loan. He seemed quite insistent that he should be able to buy such a property for no cash down and also be able to pull $13 million out of the deal.

Similar to my discussion in my last Costa Rican post, it seems that there are many property owners and their pet appraisers who insist that highly sloping raw land is just as valuable as flat land. It is actually less valuable because of the extra costs to develop the land, but in the end, the finished lots are worth more becbause of the views.  In the mean time, it takes a lot of money to convert hilly terrain into finished lots. In this instance, too, the local appraiser assigned the same value to the unbuildable Conservation land as to much smaller flat, buildable parcels in the neighborhood. This is what makes lending on land particularly vulnerable to fraud.

Some other lessons to be learned here are:

1. Borrower-ordered appraisals are not taken seriously by lenders.
2. Requesting a cash-out loan for 260% of the purchase price is not likely to be taken seriously, either.
3. The market for luxury residential real estate in the Caribbean is still weak, just as it is in most other tourist destinations of the world.

It never ceases to amaze me, too, when a seller or broker fails to take their listing of the property off of the Internet before representing that the property has a much higher value.

I saw the same thing last week in Santa Fe, New Mexico, with a property currently listed for sale for $6.9 million, having been listed for sale for nearly 3 years, with an application for title insurance in the amount of $4.5 million in favor of the buyer, but the only purchase document I received was an unsigned, post-dated purchase contract for a price of $8.5 million (with $4 million in seller financing). Considering that the $4 million in seller financing was the exact difference between the contract purchase price and the amount of title insurance, one can conclude that the $4 million second mortgage was a "soft second", a forgivable loan meant to inflate the purchase price and trick the lender and appraiser in believing that the $8.5 million purchase price represented market value.

Appraisal of Unfinished Condo Project in Barbados

My previous appraisal assignment in Barbados was in December 2009, at a time in which vacation residence projects were faltering, the most famous of which was the Four Seasons Resort at Paradise Beach, which had already pre-sold multi-million dollar villas to the likes of Simon Cowell and Andrew Lloyd Webber. Construction had halted in the spring of 2009.

                                Unfinished Four Seasons Resort

Fast forward to 31 months later, and the situation for vacation residence development is still a difficult one, with many stalled projects all over the island of Barbados, including the still-stalled Four Seasons Project. Mr. Cowell and Lloyd Webber must be livid by now, and I can just imagine Simon rolling his eyes and overusing the words “appalling” and “dreadful”.

The most highly developed section of Barbados is its west (“Platinum”) coast, home to 5-star hotels and restaurants, world famous golf courses and polo clubs, and numerous sightings of UK celebrities and princes. In my previous visit, I saw Simon Cowell’s yacht parked off shore and was shown his red Range Rover in the parking lot. This is an area with a rich tourist infrastructure.

This particular project I appraised is different in its isolated location along the Atlantic shores of the island near the town of Bathsheba. Because of high winds, rough waters, and rough topography, the Atlantic (northeast) coast of Barbados is the least populated and least popular with tourists except for surfers.

In an island oversupplied with resorts, the developer planned an end run around the competition by building the only approved condominium resort on the Atlantic Coast. There is certainly no oversupply there, but there is a question about demand.

The Atlantic Coast lacks tourist infrastructure other than its popular surfing area. But do surfers buy million-dollar villas? The proof is in the pre-sales, of which there have been none after one year of marketing. The developer has turned to fractional ownership sales, too, but once again, no sale.

I thought the problem was in the pricing of the units, and this was also the independent conclusion of CB Richard Ellis, who came up with remarkably similar appraised values.

This developer had based unit pricing on the island’s easternmost resort, The Crane, which is a much larger resort with many amenities on the eastern periphery of the tourist area of Barbados. The subject is a 43-unit condo project at least 20 minutes north of the Crane, quite off the tourist path, and lacking the resort-style amenities (such as an acclaimed restaurant) that the Crane has.

The sad conclusion to this story is that the final bulk sale value of the completed units did not justify the remaining $9 million of construction costs, and this was CBRE’s conclusion, too.

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