This article was originally published in Working RE here
They were very kind to allow me to republish and I offer it here for reach outside of the appraisal field as I believe agents might find it useful to understand what types of issues appraisers face in consideration of lake front appraisals, at least in the Midwest for the most part.
What motivates a buyer to purchase a lake property? Is it the tranquility? The beauty of the water? The excitement of a speedboat and waterskiing, or casting a line into the water in hopes of landing a trophy? It is all of these things, and none of these things. The motivations are almost as numerous as the buyers looking for a lake house are, and one buyer’s paradise is another’s hell. Different types of lakes attract different buyers, and the buyer looking for tranquility is going to be very unhappy purchasing a house on a lake crowded with jet skis and powerboats. The same would be true for the buyer who wants to have all the lake toys buying on a small quiet fishing lake.
This article is geared towards residential appraisers who are providing lake appraisals for mortgage lending. Because of increased scrutiny from the underwriters, reviewers, and GSEs, and moves towards more and more repurchase demands, I hope this offers some insight into how to provide a more defensible appraisal on these complex properties.
I’ve heard many comments about the value in a lake property being all about how many front feet you have on the water, but that is not necessarily so. The amount of frontage usually relates to space that you have between neighbors and how much area you have for docking and beach toys, but consider the house sitting on the edge of a bluff, with 200 feet of frontage and 100 steep steps down to the water. What if the shoreline is also rocky and reedy? Five lots south the topography has sloped in to a gentle almost level lot and the frontage itself is a natural sandy beach. This lot is only 50 feet in width at the lake. Which is more valuable? The value could be tied not only to the ease of the access and the quality of the frontage itself, but also very much related to the lake. For a clean swimming lake, the less wide, 50 foot lot might be much more valuable than the less accessible 200-foot lot, but for a lake that is picturesque but not a good swimming and/or boating lake, the 200-foot lot with the elevated views might be the more valuable site. It all depends on the lake and why buyers look to that particular lake.
What about the lake itself? I live and work in Michigan, and in Michigan, we are surrounded by lakes. The Great Lakes are a treasure, but not exactly the private and quiet of some of the smaller inland lakes. Many of our inland lakes are massive in size, deep and clean. Some of the inland lakes are shallow, reedy and mucky and more of a view amenity than anything else. Some lakes allow all the toys and others only a kayak or canoe. Some are merely ponds in buyer’s eyes. What one buyer wants for the lake can be completely different from another. There is starting to be a shift, as our population ages, to the desire for quiet lakes that do not allow gas motors. It used to be that these quiet “no-wake” lakes had less appeal, but in many instances now they are attracting buyers that would not have considered them 10 or 20 years ago. There is something to be said for the quiet of a lake without loud motors and loud reveling at all hours of the day and night.
All of this is a prelude, my appraiser friends, that when developing and communicating an appraisal for a lake front property, it is critical that we also address the lake. We need to talk about the lake itself, and what lakes are alternates if nothing is available on the lake which we are doing our appraisal. How large is the lake? How deep is it? What types of activities are allowed on the lake? What are the other lakes that the buyer for our property would reasonably consider and why. Spell it out for the client. Help them understand what the potential buyer is looking for. Write about the subject site, not only about the size and the frontage, but also about the topography, about the frontage, and the access to the water. Write about whether the beach is sandy, mucky, rocky, reedy, and so forth. Write about sunset/sunrise views, about parking, about docking, etc. Know your market and write about what is important to your market.
I have spelled out many reasons why most buyers consider lake properties and the subject in particular. I have laid out logical comparable search criteria, which is particularly important in lake properties because often buyers consider lakes comparable that are 20-30 miles apart; something that might scare even the most experienced of underwriters and reviewers and make the appraisers life hell if it is not well explained. Once you have spelled out the reasons for what draws a buyer to the subject lake, talk about the lakes that are competitive and why they are competitive. It sets the stage for using sometimes very distant comparables.
Take the following example write up that I completed for a lake property in my market. The lake is isolated from others, and is more of a market unto itself, but if there are inadequate sales on this lake, you cannot just make them up, so communication is critical.
The subject is located on Pleasant Lake in Freedom Township. It is on the south side of the lake. The “neighborhood” consists only of water front properties on Pleasant Lake proper, and is therefore very limited in number and has a wide variety of styles, sizes, ages, etc.
It is an unusual lake for the area due to size and access to area amenities. The lake is 202 acres in size, and has depths up to 36 feet, much of which is in the 10 foot depth range. The northern shore is sandy. There is a mixture of sand and marl on a large portion of the lake, some of which is directly north of the subject that provides good water frontage for the site. There are three areas in the lake that have deep spots. These include up to 25 feet deep along the mid-east section and another 24-foot deep spot towards the narrows in the middle, not far from the subject. Much of the lake is weedy and there have been problems with Eurasian Milfoil on the lake. Mitigation plans are in process to combat this nuisance plant.
The lake, which I consider most competitive to the subject include Clear Lake in Waterloo Township, Independence Lake in Webster Township, and Winans Lake in Hamburg Township. Only Independence Lake is within Washtenaw County and the other two are in adjoining counties (Jackson and Livingston).
Clear Lake is a smaller lake in Jackson County. It is 138 acres in size and is a natural, spring fed lake that has state land adjoining in parts. The lake has depths up to 34 feet with much of the lake around 10-15 feet in depth, much like Pleasant Lake. There is a public access point as a county park, but the access point is not for boating. Instead it is for picnicking. The lake allows for all sports but is typically quiet other than a few weekends a year. That makes it similar to Pleasant Lake. Although distant to Ann Arbor, it is in the Chelsea school district, and has a similar “vibe” as Pleasant Lake (PL) and is expected to draw many of the same buyers. Prices on the lake over the past three years have ranged from a low of $195,000 to a high of $455,000 for the sold properties, with the median sales price at $325,500 for a 2,081-sqft house. This is in the same price range as Pleasant Lake.
Winans Lake in Livingston County is a unique lake. It is not heavily populated, and is an “electric motor” only lake, which renders it much more peaceful than lakes that allow all sports. Some buyers prefer this type of lake due to the quiet and lack of worry about being hit by a boat while swimming. As Pleasant Lake is a fairly quiet lake in spite of allowing all sports, there is similarity in that respect. Winans Lake is a natural lake which is deep (up to 54 feet deep) with much of the lake in the 20 foot depth range. It is not particularly weedy and it does not have excessive housing along the lakeshore. There were only three sales on the lake through the MLS in the past three years, with the low price of $170,000, high of $452,000 and median price of $450,000 for a 2,309-sqft house. Even though this lake is not a motor lake, the fact that it is natural, is independent from other lakes, and has a wide range of housing prices and appeal, does make it similar to the subject lake.
Independence Lake is unique in that it is also very close to Ann Arbor, independent of other nearby lakes, much like Pleasant Lake. Independence Lake is surrounded by mostly State-owned land, with a state park on the north and east side of the lake. The lake itself is 192 acres and has depths up to 34 feet, with four deep areas and a lot of sandy beach area towards the north of the lake. There are cottages and year round houses only on the west and south side of the lake, and most of these properties are substantial in size (other than a number on Pellett that are seasonal). There have been four sales in the past three years on the lake through the MLS, from a low of $397,500 to a high of $630,000. The median price is $461,250 for a 2,511-sqft house. These houses are mostly much larger than those of the other lakes and the price range has been greater. Part of this relates to the size, but part also relates to the size of the lots, which are mostly an acre or more. Overall the prices on Independence Lake are slightly higher than Pleasant Lake.
Part of what makes these three lakes competitive in my opinion, is that they are natural lakes that are spring fed, are stand-alone (not part of a chain) and have a good variety of housing, plus some larger sites. There are other lakes that are also competitive, but the three noted are considered to be the best alternatives if nothing on Pleasant Lake is available. Buyers of lake properties tend to focus mainly on the lake first, and then the frontage of the property (i.e., is it sandy, a gentle slope to the lake, free of weeds and rocks, etc., as well as the amount of front footage). Houses are important as well, but with lake properties often 50% or more of the value of the property is the frontage itself. Therefore it is not at all uncommon to find lake properties that sell from $100,000 to $150,000 and have the structure torn down to build a new house. In fact, on Clear Lake a sale was located that was uninhabitable and sold for $73,500 cash in 2011 (market has increased since that time) even though it was listed for $31,000. This is land value plus the cost of demolition.
The subject Lake Frontage at the time of appointment was entirely snow covered and the actual frontage could not be observed. Per the owner the lot is sandy at the beach. Per the GIS maps this appears reasonable, as does the DNR lake maps which show a sandy area. Therefore the subject lot is expected to be a good sandy lot, which should have good appeal. In addition, the lot is a gentle slope out to the beach, which makes for good usable lake frontage of higher appeal than typical or for a lot that has a steep slope. Frontage is substantial, allowing for good privacy between the subject and the neighbors. As such, sandy beach properties with good frontage were sought as comparable sales when possible.*
Realizing this is rather a long-drawn out write-up, it may be overkill. However, given the reasons that buyers buy on lakes, and how distant comparable lakes can be (my sales were from 12-20 miles away other than one on the lake), it may be time well spent developing this type of narrative. Often it is easier to explain things at the outset, than to try to defend your report a year or more down the line.
*truncated, I eliminated some of the write-up because of length.