How to Price a Penthouse?
(Warning: This may be a very boring topic unless of course you plan to sell or buy a penthouse in the future. In such case consider required reading!) Why is this such an enigmatically difficult thing to do? How does a Seller know he/she is not underselling or overselling at a wildly under/unattainable price? How does a Buyer know he/she is not simply overpaying? At the end of the day, it really has everything to do with statistics and the laws of supply and demand. Assuming freedom & transparency of information – when there is a large enough supply of something accompanied by an equally large demand of the same thing – the free market does a good job of equilibrizing the supply-demand fair price. However, when something such as Penthouse are very few in number (there may be 100s of normal (non-Penthouse) units in a building but there may be as few as just 1 Penthouse in the building) – the velocity of transactions may be so slow that it would take 100 years to build enough data to determine the fair market equilibrium price. During that time you have inflation, economic cycles, building degradation and so many factors that make it fantastically difficult to price out using normal Econometrics (I promise this will get easier to understand so PLEASE keep reading if you can bear it!).
What is the Solution? Though not perfect, the PPPSF (Penthouse Premium Price per Square Foot) equation comes close (your author thought of it at a time he had way too much time on his hands, a long-long time ago:). To simply state the basics of the equation, instead of taking sample data from Penthouse(s) in a single building, one gathers data on as many buildings with penthouses as can possibly be attained in a specific location with similar qualities (for example all buildings with Penthouses in Kakaako and then maybe similar ones in Waikiki and Ala Moana that are over 30 floors etc.) For each building using data going historically farther back than one would for non-Penthouses (regular units) it is then possible to figure out the rough market premium people have been willing to pay for each SQF of Penthouse in a building compared to the average normal unit in the same building. For each building this is statistically still too insignificant but if combined with data from other buildings then the statistical significance becomes stronger creating a viable model.
So what is the latest PPPSF number for the Honolulu area? It is approximately 1.25 to 1.5. Taking a simple example and using PPPSF = 1.25, let’s say the median $/SQF in a building is $1,000/SQF making an average 1,000 SQF unit in the building = $1,000,000. Let’s say the penthouse on the upper most floor is 2,000 SQF with a PPPSF = 1.25 then you get 2000 SQF X $1,000/SQF X 1.25 (PPPSF) = $2,500,000 as a possible fair market price. It is very safe to say that when the PPSF starts approaching 1.5 that someone has been drinking too much punch (both the Seller and the Buyer unless, of course – the unit has been wallpapered with real gold flakes!). On the other hand, once a Penthouse gets below a PPPSF of 1.25 and approaches parity (e.g. = 1) then it could be a fantastic deal for a Buyer. I just recently did an Open House at a Penthouse where the actual PPSF at the given asking price = 1.07 (fantastic price for a Buyer).
If you are a Buyer or Seller thinking about either buying or selling a Penthouse, please do not hesitate to call/contact me and I will detail an analysis for you to be able to make the right offer (or in the case of a Seller, figure out a good fair market price to sell at). Either Buyer or Seller, just reading this newsletter should give you the upper hand (given that Penthouses or so difficult to price out) unless, of course – your Buyer/Seller counterpart is also reading this newsletter (likely not but if so then you would have a level playing field)*. Knowledge is Wealth!
*Disclaimer: Any opinions expressed in this newsletter are that of Damon Rhys only and do not necessarily reflect the views of his brokerage firm, Sachi Hawaii Pacific Century Properties. Though knowledgeable including Management Science / Quantitative Economic Decision Science & Master (MPIA) Degrees from the University of California, Damon Rhys is a licensed Realtor in the state of Hawaii. He is not a licensed Financial Advisor. For any specific investment decisions, it is advised that one consults with a licensed financial advisor. Sachi Hawaii legal counsel has advised Damon Rhys to include this disclaimer on his newsletters and blogs. Common sense should always prevail -fair advised and fair warned!