Disclaimer: I am, at this writing, a Realtor, a Property Manager and the Owner of a Property Maintenance Company. I am not an Investment Advisor, Lawyer, CPA or an advisor in any other financial field. I do recommend that you seek out the guidance of financial professionals and regard their advice.
The purpose of this draft is to lay out information that I have observed and collected over years of service. Through working with Cabins I have noticed that finding a Cabin’s value can be quite complicated.
You see, in dealing with Real Estate there are always complications. Some of these complications, like Market Value for instance, are always in a state of flux. Maybe the best way to describe Fair Market Value is to say: It is the price that a Ready, Willing and Able Buyer and Seller can agree upon. That definition leaves room for a great deal of ambiguity, but it is the simplest way to describe Fair Market Value. Other complications, like changing regulations, possible environmental factors or Economical and Political shifts are not so easy to express and that is why it is usually recommended to work with a true Real Estate Professional that can help guide you through the process to find what you need.
Attempting to simplify this complex issue, I set to work collecting data and examining many different situations trying to create a formula that functioned in the Cabin realm. After years of research I have developed a method to explain how a Cabin’s value can be found in three separate areas. However it is not as simple as taking the aggregate of each value and finding what your Cabin is worth. Each scenario must be weighed on its own merits and these valuation methods are more like THE definition of your scenario. For instance, if your scenario is that you have always wanted to own a Cabin and you just retired and want to relocate into a Cabin then your value will be calculated differently than someone who owns 6 rental Cabins in the area and is looking for a very specific set of financial requirements to purchase the 7th. In the retirement scenario Fair Market Value will be the major valuation method. For the investment property scenario the Commercial/Business valuation method will be the key; however, both scenarios will most likely have some of the Wow/Experience factor taken into consideration. Keep in mind, these three areas, Fair Market Value, Commercial/Business and the Wow/Experience factor are somewhat open to interpretation and each individual Cabin transaction will utilize at least one and maybe all of the valuation methods. Following is a brief description of these valuation methods:
1.Fair Market Value.
As stated above, Fair Market Value is constantly changing but in general, this is the easiest and most common form of Cabin Valuation. As a general rule, comparable properties that have sold recently are the largest determining factor for establishing Fair Market Value. This is what is commonly referred to as an appraisal. A lending Institution will almost certainly require an impartial appraisal of a property before it lends funds for its purchase. If you are paying cash for a property I highly recommend that you follow suit and insist on an impartial appraisal for your own insight.
2. Commercial or Business Value.
This value is derived mainly for Rental Cabins, meaning that if you plan on living in the Cabin this value does not apply to you currently but nevertheless may affect the future value of the property.
There are several ways to reach this value and no one way is always better than another simply because of the numerous financial systems employed and the individual owner’s utilization of the asset may vary greatly. Regardless, following is a list of some of these valuation systems and a brief description of how they MAY be used. Keep in mind that this is a reference and these are very loose introductions; each system has developed its individual science and following:
Gross Rent Multiplier (GRM)- This system is borrowed from the commercial property world and is how many Commercial Investors value rental property. As the name suggests this valuation system utilizes Gross Rents as a factor and then, with a mathematical formula finds a Multiplier that investors use as a scale to find how good of an investment it is for their needs and also to predict how long a property will take to pay itself off.
Cap Rate (short for Capitalization Rate as in Investment Capital or Money)- This system probably has the most variations and is therefore the toughest to describe but here are the introductory basics. Cap Rate is a formula and a ratio that deals primarily with NET operating income and the amount of original capital invested. In short it is a mathematical calculation that utilizes a ratio to tell the investor if a particular deal falls within their system of investment. If the ratio is outside of their target (ratio) range they usually pass on the deal.
EBITDA- an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. This system is how businesses are usually valued. It is a fairly simple formula to find as the name is essentially the formula. After following the formula businesses are given a multiplication factor generally between 1 and 5 depending on location and economic factors in their geographic area. For instance, a company in a very rural location valued at $100,000 with the EBITDA formula and then given a multiplication factor of 1 is worth $100,000
A similarly sized company in a stronger economic market with an EBITDA valuation of the same $100,000 amount may have a multiplier of 4 meaning the company has the opportunity to be more valuable and is therefor worth $400,000
3. WOW or Experience Value.
This valuation is actually a factor with several inputs, all of them personal; pride of ownership, personal satisfaction or achievement, the view from the Cabin, the desire of owning a Cabin, the cuddle up and hide from the world experience, even including the “I want my friends/family to share this on a special holiday value. Yes, to some people this value can be quite high. I am thinking of one Client with a short life expectancy that greatly desired to spend Christmas morning with her grandchildren and share “That View” with them. I do not know how to put a price tag on that experience, but the value is real and that situation inspired me to see that this value certainly exists and only that person can determine how valuable it truly is.
In most situations I can tell you that the true value of a particular rental Cabin is often a mix of all three valuation methods. By this I mean that since you are purchasing or selling Real Estate, fair market value will most certainly be taken into consideration. Because you are purchasing or selling an income producing property you need to address the commercial or business value to make sure it correctly aligns with your investment guidelines. Due to the fact that many Cabin owners are also planning to utilize their Cabin as a vacation home, a bit of the experience value needs to be considered in the purchase decision.
One of the biggest problems I encounter when dealing with Cabin valuations is that very often the lines between these separate values get blurred and clear guidelines for each valuation are not correctly accounted for. This inevitably causes issues down the road. If you give a high value to the experience value in your purchase decision do not expect to see high financial rewards for many years. Conversely, If you purchase a Cabin with a high emphasis on its commercial or business value do not complain that you never get to spend New Years Eve celebrating at your beautiful and amazing Cabin. Realize that someone else is paying for the right to celebrate there in your stead; Grin and bear it and then party on January 9th celebrating all the money you made! In all fairness, these instances do occur but far and away the most common problem encountered falls squarely on the shoulders of valuation number 1, Fair Market Value.
This touches on a discussion for another day, that of knowing how to run the business of your Cabin, and yes, YOU NEED to at least mentally run it as a business! That requires you to be able to predict your income and expenses- once again, a discussion for another day. For now allow me to simply say it this way, You should not care what anyone or even everyone else is paying for their asset, this is your asset and you need to know how much it is worth to YOU. For instance, if fair market value is inflating and the cost for the property is rising can you justify paying the inflated prices and risk being upside down in an economic downturn? Conversely, what if you see values rising and do not make the purchase only to see the prices skyrocket in the future and know you missed out a nice windfall?
These are actually the questions that I pondered while watching Real Estate values throughout the great recession. Searching for the answer to this conundrum is what brought me to the realization that there were other factors and valuation methods that could be used to aid in the decision making process. I have searched for years for a single formula that would simplify the process. I found in all my searching that there is not a single formula, instead, as is true in the rest of life, the secret lies in finding a balance that fits your needs.
If you want more information to help you decide if selling or buying a Cabin is the right thing for you, contact us and we can set up an appointment to discuss your particular situation. If you are wanting to sell a Cabin, We can help you find out how much your property is worth and then put together a great marketing plan. If you want to purchase a Cabin we can work through these values and help you narrow the search parameters making it easier to find what you need.
John D. Suttles
Marty Loveday and Associates Realtors- 130 Maryville HWY Seymour, TN 37865
C: 865-724-8402 O: 865-573-9444
If you are reading this article you may be in need of help with other problems on your property, for more information download my free 10 page book on the website www.TheCabinOwnersManual.com or purchase The Smoky Mtn. Cabin Owner’s Manual- a $20 value for under $10.
About the Author:
John operates Cardinal Custom Lawn Property Maintenance Solutions, www.CardinalCustomLawn.com, which maintains Mtn. properties inside and out. He serves as a Realtor with Marty Loveday and Associates, www.MartyLoveday.com/John-Suttles/ where he uses his knowledge to assist those in the Cabin industry (He is constantly looking for qualified listings to take to Market), and he authored The Smoky Mtn. Cabin Owners’s Manual www.TheCabinOwnersManual.com where he offers his experience in Cabin rentals, maintenance and market to those who want to prosper with Cabins.
John is a recognized and highly respected author, educator, and businessman with a reputation for helping individuals and organizations create helpful and sustainable results.