$11,000 per Block?

Putting a Price Tag on

Proximity to Cedar Lake

A client of mine says his engineer son-in-law has done a regression analysis calculating the premium associated with proximity to Minneapolis' Cedar Lake.

His number?

$11,000 per block.

If that's correct, that's a very valuable number to have, because lots of Realtors, appraisers -- and their clients! -- spend a lot of time and money trying to quantify just such variables.

"Ceteris Paribus"

And yet . . . as I discussed in The Art of Doing Comp's ("How Big a Premium for Small Lakefront?"), isolating and quantifying such adjustments is more difficult than it sounds.

That's because it's never the case -- at least outside new, tract developments -- that two homes, identical in every respect but their location, sell at exactly the same time.

To use a fancy term, they flunk the "ceteris paribus" test ("everything else held equal").

So, if the two homes are the same size and style, one's much more updated; if they're equally updated, one's substantially bigger; if they're the same style, size, and condition, they sold two years apart, in different market conditions.

Theory vs. Practice

Which doesn't mean that Realtors and others don't estimate premiums and discounts, for many variables, every day.

It's just that it's more a "gut," judgment call than a hard-and-fast objective number.

P.S.: my number for Cedar Lake proximity? I'd start with 2% per block, but would tweak that depending on which block (some are clearly nicer than others).

I also know that the East part of Fern Hill -- between Monterey and France -- commands a bigger premium than "West" Fern Hill, and that a handful of homes on Glenhurst and Huntington with lakeviews command much bigger premiums.

How Big a Premium for Small Lakefront?

The Art of Doing Comp's

I'm working on an assignment for a client now that's proving devilishly difficult: identify the premium associated with a home on a small, metro lake so that it can be priced appropriately for sale.

The lake in question isn't Lake Minnetonka, Lake of the Isles, or other "marquee" name. Rather, it's just one of hundreds of small lakes -- picturesque, but not really big enough for boating or other water sports -- that dot the Twin Cities.

Puzzle Pieces

In theory, answering the question is easy: just find two identical homes, one on a small lake and another across the street, that sold at the same time -- then calculate the percentage difference.

Of course, that's nearly impossible to do: after screening upwards of 200 home sales on six different metro lakes over a five-year period, there's always one -- if not multiple -- differences.

If the homes sold in the same market (roughly defined as within six months of one another), the size, style, and condition were different.

If the size and style were similar, the sales dates and condition were different.

And so on and so on.

Further complicating matters: some homes across the street from lakes have views (because they're on a hill), while others don't. As you'd expect, the premium between "lakefront" and "lakeview" is smaller than between lakefront and "no lakeview."

The number of permutations, distinctions, etc. would make anyone but a statistician (and I'm not) throw up their hands.

Permutations & Interpolation

So what to do?

Find the closest match(es), then use "interpolation" to close the gap between the dissimilar traits.

So, in one case, I found two, quite similar homes -- one on a lake, the other across the street -- that sold 18 months apart. To determine the lakefront premium, I calculated the change in market prices for the area over that period.

In a second case, I took two homes that sold within a few months of each other, and were in similar (good) condition -- but were quite different in both size and style.

In that case, the challenge was to appropriately adjust for style and size.

Conclusion

Needless to say, the premium is necessarily a range: some homeowners especially prize lakefront, others actually consider it a drawback (families with small children, for example).

It's also true that in many cases, much of what appears to be a lakefront premium is actually explained by the difference in the neighboring homes themselves: the one backing up to the lake is much bigger and ritzier than its neighbor across the street (surprise, surprise).

Factor all of the foregoing in, what do you find?

The premium for small lakefront property would appear to be between 20% and 30%.