Thursday, November 7, 2013

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.

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