How To Determine The Value of Your Las Vegas Property Part 1

Today, I continue with part 2 of my series discussing how to value your potential investment properties using the method I use for Broker Price Opinions.

Adjustments

Once you have obtained your comparables, adjustments are then made to the comparable properties to reflect their features that are superior or inferior to the subject property.  IMPORTANT: The adjustments are calculated on the price of the comparable properties, not the subject.   For example, if a comp sold for $180,000, then you will add or subtract adjustments to that $180,000 in order to account for positive or negative relative features of the subject property. After the necessary adjustments are made, we are left with a reasonably accurate picture of the worth of the subject property. It can be confusing at first, determining whether an adjustment to the price of the comp should be positive or negative, but it gets easier with practice. The basic idea is to use a negative adjustment on the comparable property, if the comp has superior features to the subject property and positive adjustments on the comparable property if the comp has inferior features to subject property.  A BPO looks much like an appraisal, and the adjustments work the same way. Below is an example of a typical BPO/appraisal adjustment spreadsheet.



Based on the above comparables and adjustments, the subject property is worth between $439K and $509K.

How to Calculate Adjustments

Calculating adjustments is a judgment call based on an individual market.  When adjusting for square footage, one should take into account the average price per square foot at which comparable properties are selling in the specific neighborhood being evaluated. As a general rule of thumb, extra bedrooms are worth around $8,000. It is often surprising to people to learn that upgrades like pools and exceptional finishes don't necessarily add much to a property in terms of appraised value. They do, however, make the property easier to rent and easier to sell.

How To Determine The Value of Your Las Vegas Property Part 1

As Las Vegas home prices continue to rise, many homeowners are finding themselves in a position to sell their homes.  Investors, also, may be looking to cash-in for a profit on properties they purchased at the bottom of the market.  Clients often approach me asking for guidance on their list price.  They want to know what their property is worth.  Certainly, there is no substitute for a Realtor that really knows their city and can help you understand the intricacies of pricing within certain neighborhoods, price points, and subdivisions. But even an out of town investor, with little familiarity for the Las Vegas market, can calculate a reasonable value for their property by knowing how to adjust local comps.

Over the years, I have completed numerous broker price opinions (BPOs) for banks.  Broker price opinions help lending institutions determine values on properties.  Using the BPO pricing format can help you to generate your own reasonable evaluation of what your property is worth. When completing a BPO, you are required to reference three sold and three active comparables. Those comps should be as similar to the subject property as possible. But, since comparable properties can vary tremendously between those that are very similar to the subject property (such as model matches) and those that are quite different (areas with limited inventory) the key to an accurate BPO is making accurate adjustments. Every home is different and making accurate monetary adjustments to account for those differences is the key to producing an accurate BPO.
Let's begin by examining the typical bank guidelines for selecting comps to use in valuing a property.

BPO Guidelines

• Distance:  All comps must be within 1 mile of the subject property if it is in an urban or suburban neighborhood.

• Age:  All comps must be within 10 years of subject property, unless the home is over 50 years old.  At that point the age brackets can be widened as necessary.

• Size/square Footage:  Square footage for possible comps must be within 20% of the subject property.  Basement square footage and finish are evaluated separately from above ground square footage and is valued at a different rate.

• Property type:  Comparable properties must be the same type as subject.  Single family detached homes must be compared to single family detached homes, duplexes to duplexes, condos to condos, etc..

• Bedroom/bathroom count: Comparable properties must have a bedroom and bathroom count within one unit of the subject property.

• Style:  Although not required, it is advisable to compare similar styles of home.  Two story homes should be compared to two story homes, split level to split level, ranch to ranch.

• Sale date:  Sold comps should have a close date within the last six months. Many banks prefer three months.

Exceptions to Guidelines

Not every property has three perfect sold and active comparables in the same neighborhood.  If you have to break the guidelines, make sure that you are breaking them because you legitimately have to, not because you are using comps that provide you with a higher (or lower) price target. When preparing a BPO for a bank or other lending institution, brokers are required to thoroughly document any exceptions they have made to the guidelines.  This is a good practice for private investors as well.

In my next article, I will discuss the adjustments that must be made to comparables to arrive at an accurate BPO.

Three Methods for Valuing Property - And How They Matter to Investors

When we talk about what a property is “worth” we are making a judgment as to the value of that property. As real estate investors, it is crucial that we be able to accurately determine the values of our current holdings as well as our potential investments. In this article I am going to discuss the three main methods used to value property and how each of them pertains specifically to real estate investors.

Comparables

Sales comparables, or “comps”, are the most widely discussed and understood method for valuing residential real estate. This method of valuation has absolutely zero correlation to any tangible or permanent value (such as the cost of materials or land.) It is based solely on the laws of supply and demand. According to sales comparables, a property is worth exactly what consumers are willing to pay for it at that time. The most important aspect of correctly using comps to determine the value of a property is making sure that there is an apples to apples comparison. Every effort should be made to compare the home being valued with homes of similar size, location, amenities, finishes and condition.

Unfortunately, in the last year, we have run into major difficulties in the Las Vegas real estate market obtaining fair and accurate appraisals for our newly rehabbed properties. This is because some appraisers insist on valuing our completely turn-key, fully renovated properties at the same price per square foot as damaged foreclosures or REOs in the same neighborhood. I have spoken to numerous colleagues around the U.S. who are encountering similar difficulties. As an investor, when you are looking to value a property prior to purchase, it is important to note the condition of your prospective investment in comparison to other properties that might be listed as comparables.

Capitalization Rate

The most popular method used by investors to evaluate a potential purchase is capitalization or CAP rate. CAP rate is determined by dividing the Net Operating Income of a property by it’s acquisition cost. For a more detailed explanation of how to determine a CAP rate CLICK HERE to read my article on this subject.

Several factors go into determining what makes a “good” CAP rate for a particular investment property. Here in Las Vegas, we tell our investors to shoot for CAP rates of 10% or greater. For a more thorough discussion of what makes a good CAP rate please CLICK HERE to ready my article.

Builders’ Replacement Cost

The final method used to determine property value is builders’ replacement costs. This references how much it would cost in the current market to rebuild a particular property in the event of a total loss. To determine this, the total square footage of a structure is multiplied by the current cost per square foot of new construction in the area. This valuation is often used by insurance companies who are underwriting properties for homeowners’ policies.

For investors, builders’ replacement costs can provide a helpful benchmark for giving properties a more tangible valuation then comps alone. Investors who took note of the huge gap between builders’ replacement costs and actual market prices in Las Vegas in 2007 realized that a market correction was imminent and inevitable.

With completely renovated properties selling below builders’ replacement costs and CAP rates higher than we’ve seen in decades, now is the time to invest in real estate in Las Vegas. If you are interested in learning more about what Team Plantone has to offer investors, please contact Glenn.

An Open Letter to Appraisers In the Las Vegas Real Estate Market

For the last three years, my team and I have purchased, renovated and resold over 100 properties in the Northwest Las Vegas area. Currently, our greatest challenge lies not in construction headaches, buying competition or even the scarcity of financing but in obtaining fair appraisals for our renovated homes that are re-entering the market.

Our business model consists of purchasing homes at a discount (REOs, trustees’ sales, and short sales), fixing them up, and selling them at today's retail value. Our properties sell at the top of the market because of the quality that we put into them. Most of our homes are literally better than new construction. We only rehab houses that are 10 years old or newer, and then we put in lots of upgrades that builders do not: landscaping, ceiling fans, blinds, upgraded flooring and fixtures, complete appliance packages (often including washer and dryer.) Of course, we also include new carpet, new (non-white) paint, and the like.

Even though our properties are generally better than any other homes available in the neighborhood, we still generally price them below the highest recent comp for the area. This is because we know that because our property is a flip (being resold within 90 days of our purchase) it is going to be more closely scrutinized by the lending bank and will often require two appraisals.

Our request to you, the appraiser, is simply that you compare apples to apples when drawing up your appraisal. As you know, most distressed properties (REOs and short sales) are in very poor condition. Our homes are not distressed and as such they sell for a price higher than trustees’ sale purchases, REOs, and short sales. When you are looking at comparable sales in the area, we would ask that you compare non-distressed sales and not use REOs and short sales in your comps, just as you would not use trustees’ sale data. We understand that non-distressed homes are the minority at the moment and that REOs and short sales make up as much as 75% of the resale market at this time. However, there are sufficient examples of non-distressed sales in the area to paint an accurate picture of comparable value.

According to Larry Murphy (of Las Vegas Crystal Ball and SalesTraq) certain types of homes are currently selling for certain dollar amounts per square foot in the Las Vegas marketplace. As of June 2011, Murphy released figures based on his exhaustive database of recent sales that shows that trustees’ sale homes are currently selling for around $65 per square foot, bank owned foreclosures (REO’s) for about $71 per square foot, short sales for around $80 per square foot, non-distressed properties at $88 per square foot, and new construction at $100 per square foot.

We appreciate your efforts to use the right types of homes in your market research during this challenging period in the real estate market.
Glenn Plantone
Wynn Realty
(702) 656-3264
gsplantone@gmail.com

www.glennplantone.com

If you’d like to see more of Glenn’s articles, follow his blog at:
www.vegasforeclosures.blogspot.com

Update on MGM Signature Towers

The last time I reported on the MGM Signature Towers was in late April when new low comps were established for both Studio and 1 Bedroom units at the close of the MGM auction. I wanted to take a moment to update my readers as prices continue to drop on these properties here in Las Vegas.
I have been following the MGM Signature Towers project since its inception in 2003 and 2004 and have stayed as far away as possible until recently as purchasing made no sense from a cash flow perspective. But as you know, things change quickly in Las Vegas and this investment is beginning to look a lot more lucrative. I will explain.
If you are unfamiliar with the hotel condo concept, it is quite simply explained as follows: You the investor buy and own the actual condo with all of its luxury furnishings, and the condo is put into a rental program and managed by a
management company (in this case as part of the MGM Hotel and Casino). There are a lot of calculations that lead to how much revenue owners will make (or not make) from their condo hotel but a reasonably accurate estimate in the case of the Signature Towers would call for the owner to end up with about 40% of the gross revenues from the rental of the room. In simple math, if a condo hotel room is rented for $100 per night, the owner will net about $40. Of course there are some perks to ownership of the unit as the owner can use it themselves (with a reservation) or the room does not have to be in the rental program at all. If someone wished to live in their luxury condo unit they could choose to do so. The home owner’s association fees are quite high, at near $400 for the studio unit and $900 for the one bedroom unit. These fees pay for the luxury resort amenities which are separate from, yet still attached to, the MGM Hotel. The Signature Towers resort features two exercise rooms, valet parking, guest services, coffee shop, lounge, deli, several pools, high speed internet service throughout and a gift shop.
The hotel condo project was sold in three stages with tower 1 (145 East Harmon) completed in 2005. This building is closest to the MGM hotel and was the first building of the three to be finished. Units in this building sold for between
$300,000-$600,000 for the smaller studio units (520 square feet) and $500,000 - $1,000,000 for the 1 bedroom units. The second tower was the 135 East Harmon tower which was completed in 2006. Studio units sold for a little higher, in the
$400,000 to $700,000 range, and 1 bedroom units remained the same at $500,000 to $1,000,000. The last tower to be built, 125 East Harmon, sold for even higher prices. It was completed in 2006 with studio units selling for $500,000 to
$800,000 and 1 bedroom units fetching prices from $700,000 to over $1 million.
Note that because tower one was sold at lower prices there have been less foreclosures coming on the market from this tower (145). As investors grossly overpaid for units in all buildings, but especially buildings two and three, we are
now seeing a high rate of foreclosures begin to hit the market. I believe that as early investors begin to see how far upside down they are we may see even more people letting their units go as their equity or perceived equity is non-existent.
Over the last year there have been 92 re-sales as a combined total from all three buildings. As of April 2009 the lowest priced 1 bedroom unit had sold for $274,000 and the lowest priced studio unit had sold for $174,000. This was, of course, well below the original sales prices of just a few years earlier. Then in late April of this year, an auction took place at the MGM and 20 units were sold off in about 2 hours time. I reported on this auction in my blog as a new low of $202,000 for one bedrooms and $160,000 for studios were established.
It was about this time that I stepped in and began to educate my database of investors about these units as I could see that the prices were beginning to move closer to the point where they could hit bottom and actually begin to make
sense as an investment for those looking to keep them in the rental program.
When looking at units from these high rise towers, each investor will want to be concerned with the price of the unit, its “rentability” potential, the profitability of the investment, and the future appreciation potential of the property.
I have identified 7 items that have a direct effect on these factors. These 7 items include the following:

1. Odd/Even address numbers: Odd = strip side views and Even = mountain views.
2. One bedroom unit (874 or 847 sq. ft) or studio unit (520 square feet)?
3. Handicapped unit or regular unit?
4. Does the unit have a balcony or not?
5. Is the unit located on a high floor or a low floor?
6. How is the View (strip/mountain/airport/pool)?
7. Is it a penthouse floor (29 to 33)? (Comes with a higher ceiling.)

Since April I have been working with several investors and fighting to get the lowest price possible for them on the units they are looking to take down. All this hard work paid o this past Friday the 17th as one of my investors closed on a lower oor studio unit at only $99,000. This new low blew away the previous low comp of $140,000 for a studio from only a couple of months back.
The very next day, Saturday July 18th, I attended the second auction for the MGM Signature Towers with cashiers check in hand ready to pounce on a 1 bedroom unit for another client. And as I predicted, a new low was achieved when the 1 bedroom sold at auction for $180,000 ($22,000 less than the previous low). The unit was in tower 1 ( first building), 7th floor, with a balcony and a nice pool view on the mountain side (even number). The unit sold originally for $540,000 and made for a nice deal at 33 cents on the dollar from the original high. This lower comp should help motivate the banks to continue pushing prices down into a range that will produce more investors traffic as people look to scarf up these luxurious condo hotels.
As of this writing, there are 155 units listed for sale in the entire MGM Signature Towers project. There are only 22 that are REO/bank owned foreclosures and 68 short sales. The remaining 65 units listed for sale are upside down owners who will not be able to resell their units at their asking prices for many, many years.
Anyone seriously interested in taking down a unit at today’s new lower prices should contact me as soon as possible as inventory is very light at this time. I am not sure how low the prices will go but I truly believe a studio at $100k and a one bedroom unit at $150k are very good deals.
This Friday the 24th of July there will be a third (silent) auction that will be taking place on 10 units at the MGM Signature Towers. You must be registered in advance in order to bid online. The highest bidder’s o er will be presented to the bank. If the bank accepts the bid, you will get the condo at your winning bid price. If the minimum (unpublished reserve bid) is not met, the deal will be renegotiated or you can walk away. There is no earnest money required for the silent auction. Call or email me for details to register.