The speed at which prices have rocketed upward over the past 18 months on the Vero Beach barrier island has made it hard to settle on an offering price for new real estate listings, and has complicated the homebuying process when a mortgage is involved.
Bankers, mortgage brokers, real estate appraisers and island agents all say that comps – the abbreviation for comparable sales in an area and long the standard by which property is valued when it is put on the market – have become less accurate in many cases, and often “irrelevant,” in Vero’s high-flying market.
Comps are the main way real estate agents traditionally zero in on a list price for a property going on the market, one that nets the highest return but doesn’t sit on the market.
Brokers and agents look at MLS records to see what houses like the one they are listing sold for within the past six months or year to get a sense of what a buyer is likely to pay.
When a buyer and seller make a deal through their agents, a professional appraiser comes in and repeats the process in great detail, looking at size, features, condition and location of the property, and then finding nearby houses that most resemble it to come up with a market value.
But the backward-looking nature of comps undercut their accuracy in 2021 when single-family home prices in Indian River County jumped 20 percent, according to Floridarealtors.org. On the island, the median home sales price went up a dizzying 32.5 percent, according to Zillow.com.
“Appraisers typically look back 12 months for comps, but in this market what happened a year ago is irrelevant today,” said Richard Boga at Premier Estate Properties. “In fact, anything older than 90 days is old news.”
Buyers usually have appraisal contingencies in their purchase contracts and if the appraiser says the house is worth less than the contract price, they can balk and ask for a price reduction, which can complicate or kill a deal.
Appraisals based on backward-looking comps “have the potential to blow up a lot of deals,” said Vero mortgage broker Clay Collins.
If a home in Castaway Cove goes under contract for $1 million and an appraisal based on outdated comps comes in with a value of $900,000, the buyer could walk away if the seller wouldn’t renegotiate.
At the same time, if the buyer is getting a mortgage, a low appraisal means the bank wouldn’t give them a loan based on the contract price, which could torpedo the deal unless they come up with the cash to bridge the gap.
“We have seen it,” said Marine Bank chief lending officer Shaun Williams. “What ends up happening is our borrower, armed with the lower appraisal, goes back to their agent and asks them to renegotiate with the selling agent. But that very seldom works [in a market with many multiple offers] because the selling agent says, ‘Fine, we will just go on to the next buyer.’
“The bank would love for the appraisal to be accurate,” Williams added. “We understand they are backward looking, but we are highly regulated and aren’t in a position to go further than the appraisal. We have to base our decision on something, and the appraisal is it. We might feel intuitively that the property is worth more, but we have to value it according to the appraisal.”
Marine Bank president Bill Penney said the bank would still be willing to provide a mortgage loan based on the appraised value of the hypothetical Castaway Cove home if the buyer was able to bridge the gap by putting more cash into the deal.
“As long as they have the cash to put in, we are fine – unless it depletes their cash reserves, which could cause a problem with underwriting,” said Williams.
“Appraisers weren’t making the numbers last year and that meant there had to be some kind of adjustment somewhere down the line,” according to Karl Dietrich, an AMAC Alex MacWilliam agent and longtime professional property appraiser, who said the fast-moving market “made my job more challenging, no doubt about it.”
Dietrich said he is allowed to factor in the rising market when he appraises a house, but that it is tricky. “Yes, I can make a positive time adjustment, but it is a thin line. You better be sure you can back it up.”
Berkshire Hathaway agent Chip Landers, who sells homes on the island and the mainland, said houses “that don’t appraise” are more of a problem for buyers at the low end of the market who need a mortgage and don’t have extra cash on hand than for island buyers.
“I had a buyer who was trying to buy a house for $220,000 that appraised at $210,000 and they didn’t have the extra money to close the deal,” Landers said.
On the island, most buyers pay cash or have the resources to make up the difference if the contract price and bank appraisal diverge.
But that still leaves island agents out in a no man’s land when it comes to setting a listing price.
Brokers and agents have to navigate between pricing a property too low, based on traditional comps, causing their client to leave money on the table, and giving in to sellers intoxicated by rising values who want to list at a price that is crazy high.
And it is a challenge.
“I am a numbers guy and I always run the numbers, but I still get surprised,” says Landers.
“The question is, how much over the comp value should I list the house? At Pointe West, I take my comps and add 20 or 30 percent, and they still sell in a few days – sometimes for over the asking price.”
Island broker Sally Daley uses a percentage system, too, figuring the comps that apply to her listings and adding a kind of pandemic surcharge to account for rapidly increasing prices. But she doesn’t do it in a rigidly formulaic way.
“You can’t just look in the rearview at comps,” Daley said. “You have to look at the competition in the current market.”
If her client’s home is in good condition and has little competition, she adds a higher percentage than if competition is greater.
“That is the formula we are using, and it has worked,” Daley said. “We just sold a house in Queens Cove down in North Hutch that the comps were like $765,000. I told the clients I wanted to list for $800,000, $35,000 over the comps. That made them a little nervous that we might be too high, but we sold it the first day for $811,000.”
Zeroing in on the perfect asking price gets harder the higher up in the real estate stratosphere you go.
There are fewer comps to begin with for ultra-luxury homes, $10 million and up; the properties tend to be more unique so that two oceanfront houses the same size might not be all that comparable due to features, finishes and condition.
And because they are trophy properties, there’s always the possibility that a wealthy buyer will be willing to pay well over “market value” to secure a property that strikes their fancy and really suits their needs.
“Emotional value became market value in many cases in 2021, absolutely,” said Premier Estate Properties broker associate Cindy O’Dare.
Due to that phenomenon, O’Dare and her partner Richard Boga were more willing to test the market last year, listing at a high price compared to comps to try and meet sellers’ expectations.
That strategy paid off in record-breaking sales on the ocean and the river, but they did not pursue it blindly.
Instead they relied on a feel for the market developed over decades of selling homes on the island and wide array of data, including proprietary information.
“If we had a similar house under contract for well over what the comps would support, that wasn’t public knowledge, but it gave us a sense of where the market was at and helped us come up with the right price,” O’Dare said.
Also, “knowing the list of buyers we have, what they are willing to pay compared to what things sold for historically, informs the price quite a bit,” Boga said.
“If people who were looking up to $10 million now say they are ready to spend up to $12 million or $13 million, that means, psychologically, that they are prepared to pay 20 or 30 percent more than the last guy did for a similar home,” because they know how fast the market is rising and really want the property.”
“We do have a science to pricing the big properties,” said O’Dare. “It is based in part on knowing everything else in the same price range that is on the market on the east coast of Florida. Being a member of the Palm Beach Board of Realtors and having connections in South Florida through Premier and due to my past selling in Miami, we are aware of all the big, beautiful oceanfront estates.”
“When we listed 1920 A1A, we priced it where we did because we knew it would be the only property of that caliber with acreage on the ocean anywhere between here and Miami offered for under $30 million.”
That market knowledge and strategic thinking paid off in November, when 1920 A1A sold for $27 million, which was $10 million more than it sold for in 2015 and the highest price ever paid for a piece of residential real estate on the barrier island.
Pricing challenges may lessen in 2022. Zillow predicts that home prices on the island will rise “just” 17 percent this year, about half of the 2021 price gain.
In the meantime, those backward-looking comps and low appraisals aren’t necessarily all bad.
Island brokers, bankers and even appraisers say they can be a useful brake on the market that helps keep it from getting too overheated and turning into a wild boom headed for a bust.