Friday, February 10, 2012

Appraisal of Beach Land in Nayarit, Mexico

This appraisal assignment illustrates the problems in obtaining reliable Mexican market data.

The subject property is about 100 hectares of raw, beachfront land located on the Novillero Peninsula in the state of Nayarit, about a two-hour ride south from Mazatlan, Sinaloa on Mexico’s west coast. Playa Novillero has the distinction of being Mexico’s longest continuous beach, at 82 kilometers. The beach itself is not particularly impressive, consisting of dark colored sand and lacking distinctive physical features, but it does have coconut palms and is quite wide and flat.

Unlike the Mazatlan area to the north and the Nayarit Riviera to the south (close to Puerto Vallarta), the Novillero area is characterized by abandonment rather than development. I saw no new development, but plenty of abandoned beach homes. One problem is the lack of good road access to this area.
Abandoned Novillero beach homes

Prior to my arrival I was told that the owner had acquired the parcel in 1998, had received an offer of $7 million for the property and had a Mexican appraisal estimating value to be about $5.9 million.

When I obtained the escritura (deed), however, it indicated that the owner had purchased the property a year ago for only about $85,000.

Which number more accurately reflected market value? Most likely, none of these numbers, for the following reasons:

1. The only honest Mexican appraisal I’ve ever seen was one I ordered myself.

2. If I took “offers” seriously as indicators of market value, my lender clients would have ended up foreclosing on allegedly $50 million worth of scattered woodlands in rural Tennessee, an allegedly $100 million mountain in northern California, and an allegedly $100 million isolated Texas beach.

3. It is standard practice in Mexico to understate sales prices in deed transfers in order to minimize the 2% transfer tax required of the seller. It doesn’t matter that it is also illegal tax evasion witnessed and sanctioned by notaries public; the tax laws do not seem to be enforced.

I did ask the property owner to tell me whether the deed was correct, to which he indicated no, and then submitted documentation that he actually paid over $1 million, more than 12 times as much as was recorded, which seemed credible in light of much higher asking prices in the area.

Still, it bothered me that the Mexican appraisal valued the property at more than 5 times the price allegedly paid for it a year ago (and 68 times what was officially recorded as being paid), when this was the last sale in the area. How could he document an increase in value of that magnitude? When asked to show his comps, the Mexican appraiser presented listings only, no closed sales, with prices ranging from $10,000 to $30,000 per lineal meter of beach. The last closed sale I know of was at about $1500 per lineal meter, so why are asking prices so much higher than the last closed sales?

One factor influencing asking prices in southern Sinaloa, on the other side of the estuary from Novillero, was the announcement 3 years ago of a grand tourist development project sponsored by FONATUR, the Mexican government's tourist development agency. Southern Sinaloa state will be groomed to become "the next Cancun", although it lacks Cancun's white sand beaches.
The excitement has driven up beach land prices in southern Sinaloa to as high as $30,000 per lineal meter.

These high expectations have crossed the estuary which separates the states of Sinaloa and Nayarit, and asking prices on Novillero beach land are also in the range of $10,000 to $20,000 per lineal meter. Unfortunately, although Sinaloa and Novillero are just a few km apart as the crow flies, there is no bridge over the estuary and one has to drive miles inland to the highway to travel north and then travel miles back to the beaches of Sinaloa, which are much more accessible to tourists coming from Mazatlan, the general entry point for tourists in this region.

Inflated asking prices are not the same as closed sales as indicators of value, and the only closed sale I have was at about $1500 per lineal meter, far lower than current asking prices in the area. It also worries me that everything is for sale and nothing is selling.

Next stop: Bahia, Brazil
Enhanced by Zemanta


ant. a. said...

I guess you cannot use any of the deeds in Mexico. That's worse than a non-disclosure state.

Has the drug war impacted values in this areas? It's quite the stigma.

Vernon Martin, MSRE, CFE said...

Nayarit is not known for drug violence, but Sinaloa is, and the way to Novillero is through Sinaloa. Because properties like this one are ultimately dependent upon tourism, you ask a good question, for which I cannot find enough consistent data to provide a definitive answer.

For instance, I keep on reading statistics that U.S. tourists are visiting Mexico in ever increasing numbers, yet the resorts I've stayed at down there seem like ghost towns, and my own mother begs me not to travel to Mexico. Are the statistics true, or just self-serving PR from the Mexican tourism industry?

I had an assignment in Acapulco in 2008, after an absence of 21 years, and found American tourists to be gone, but replaced by plenty more Mexican tourists. Domestic tourism seems less concerned by drug violence.

Many parts of Mexico are safe, by the way, and I've never had any problems there.

Sharon Bush said...

Some truly wonderful posts on this internet site , thankyou for contribution.