Some of the more common mistakes made by appraisers when completing golf property appraisal assignments are comparing courses of different types; not providing proper support for the highest and best use determination; omitting management and capital reserve expenses; not visiting competing properties; and using outdated or inadequate market data, irrelevant units of comparison, inappropriate approaches to value, unrealistic income/expense estimates, or incorrect capitalization rates.
Comparing Courses of Different Types
Since most appraisers encounter very few golf course assignments, they often perceive that there is a dearth of comparable sales and don’t always properly identify the competitive markets. Comparing private clubs (which focus on annual dues) with daily-fee courses (which focus on revenues from public daily play) can be deceptive because of their different operating profiles. Different types of courses compete in different markets and often appeal to different groups of buyers. If at all possible, it is best to focus comparison for both sales and competitive properties on courses of the same operating type.
Poorly Supported Highest and Best Use
Not only do many appraisers simply determine that the highest and best use of a golf property is as a “golf course” without specifying which type or segment, but they also often provide no support for the conclusion. The market analysis should provide adequate support for the highest and best use determination, along with an evaluation of the property’s historical performance and physical characteristics.
Use of Outdated Market Data
Because many appraisers are geographically oriented, they often search only for golf property sales in a very small area. Due to the small number of golf courses and somewhat infrequent sales, many choose to utilize dated sales. There is no general rule of thumb to follow about how old a sale can be, as this varies for each assignment depending on the availability of data. However, with changes in economic conditions should come boundaries for sales selection. For instance, the use of pre-recession comparable sales for valuations after September 2008 would be difficult to reconcile.
Use of Inadequate Market Data
Many appraisers fail to “get into the weeds” and obtain competitive market or sales data beyond what is publicly available online. Published “rack rates” only tell part of the story. The appraiser should also learn the number of rounds or members and the gross revenue produced by a club to get a better picture. While garnering this information takes time and it is unlikely that all of the desired information will be found, making a true attempt is essential.
Use of Irrelevant Units Of Comparison
Appraisers may rely on irrelevant units of comparison in the sales comparison approach if they are unfamiliar with golf property valuation or if data is unavailable. Using a dollar-per-hole unit doesn’t provide a common denominator because most courses have the same number of holes (18) and all have a number that is a derivative of nine. Using price per acre is also irrelevant because the market simply doesn’t buy golf courses that way, except in the case of land bank acquisitions. Today, many buyers use a simple gross revenue multiple.
Use of Inappropriate Approaches
Often, appraisers rely on the cost approach because they find that it is too difficult to compile data and other aspects of the golf appraisal process take too much time to learn. As stated earlier, the cost approach has very limited usefulness in golf property appraisals and is rarely reflective of market activity. Sometimes, the sales comparison approach or income capitalization approach are also unreliable for a number of reasons, including poor data. It is incumbent upon the appraiser to understand how the market would evaluate the property.
Use of Unrealistic Income/Expense Estimates
Appraisers make unrealistic and unachievable income/expense estimates by using only published rack rates, not researching comparable properties adequately, or not understanding the subject property. Sometimes, actual expenses may be excessive and not recognized to the point at which value is reflected more accurately through an adjustment using more efficient estimates that are achievable. It is not uncommon for rounds estimates to be unreasonably high, which can significantly impact value. These estimates need to be adequately supported from the market.
Omission of Management and Capital Reserve Expense
Many golf property appraisals fail to allow for management expenses (which most buyers include in their analyses) and capital reserves. The funding of replacements is critical because if an item is in need of replacement (irrigation, cart paths, etc.), the buyer is likely to deduct the cost from the purchase price.
Using Incorrect Capitalization Rates
Because golf properties represent the valuation of a going concern, capitalization rates are different (usually higher) for golf properties than they are for traditional investment real estate. Multiple sources of data exist for estimating appropriate capitalization rates that are accurately reflective of the marketplace.
Not Visiting the Competition
In today’s world of time and fee-pressured appraisals, few appraisers take the time to visit competitive courses. Not only is it valuable to see what the competition looks like for comparison purposes, but often a visit gleans information from the staff that would be otherwise unavailable. It is also advisable to visit comparable sales. Although this sometimes isn’t practical because of the great distance that can be involved, comparable sales should be visited when possible.
Laurence A. Hirsh, MAI, CRE, SGA, is president of Golf Property Analysts. His article is excerpted from a new book, Golf Property Analysis and Valuation. He can be reached at [email protected] or 717-652-9800.
©2016 Reprinted with permission from the Appraisal Institute, Chicago, Illinois. All Rights Reserved.