Should a property’s value depend on who owns it? For so-called “celebrity homes,” the answer is not always clear.
Consider the case of the late Katharine Hepburn. There has been much ado about her Fenwick, Connecticut 3.5-acre estate and 8,300 square foot home ever since she passed in July 2003.
A Storied History
When Ms. Hepburn’s Connecticut property was first up for sale in 2003, the initial asking price was $12 million. To “nearly everyone associated with the house,” that asking price said “more about its former owner than about its design or the three acres of beachfront property that come with it,” as reported in the New York Times in October 2003. A developer purchased the property two years later for $6 million—just half the asking price—and extensively renovated it for resale as a family compound.
The developer has put the renovated property on the market several times, but to this day there has not been a buyer, as reported in the Hartford Courant. That appears to be largely due to the “celebrity home” asking price. For example, the developer listed the renovated property at $28 million in 2011, as reported in the Hartford Courant. At one point, the asking price was as high as $30 million.
Alone, that story might suggest that a home’s celebrity status indeed affects its value. But there was a hiccup. Shortly after the developer purchased the property, the Borough of Fenwick notified it that the Borough owned a thirty-foot wide discontinued road crossing the Hepburn property’s lawn. Upon learning of the borough’s claim, the developer submitted a loss claim under a title insurance policy it had purchased contemporaneously with the property. The title insurance company cut a $17,000 check for the loss based on its own property appraisal, but the developer objected and claimed that the check did not accurately reflect the property’s value, nor the loss that the developer suffered upon learning of the Borough’s title claim. The developer posited that the loss should instead be $5 million. Litigation followed. [See First American Title Insurance Company v. 273 Water Street, LLC, Connecticut Appellate Court, May 5, 2015.]
At trial, the court admitted testimony from the development company’s expert witness regarding a “celebrity enhancement” valuation theory. That is to say, the court allowed the expert witness to tell the jury that a home’s celebrity status “can greatly affect its value.” On appeal, the title insurance company argued that the celebrity enhancement theory is “junk science” and served primarily to arouse the jury’s emotions. However, the appellate court found that there was no harm in admitting the expert witness. The celebrity enhancement theory stood.
Theory in Dispute
Notwithstanding the Hepburn estate example, there are some experts who disagree with the celebrity enhancement theory. For example, one expert argues that “[a]lthough the masses respond to rock-star branding, housing is too expensive for celebrity ownership to make a measurable dollar difference,” as reported by the LA Times in 2012. She distinguishes the art market from the housing market and explains that the art market’s “provenance” concept does not translate to the housing market. Authenticating provenance—the historical object’s ownership chronology—typically precedes an art sale so that the purchaser can rest assured that the item is not a fraud.
Other experts focus on celebrities who own multiple homes. Celebrities often move frequently and lack a deep connection to any one particular home. Some experts suggest that in those cases, the celebrity’s brand name does little to increase the sale price, especially compared to situations in which the celebrity had owned just one home. Perhaps I should not care that I am buying “the Donald’s” condominium if it’s just one of many and if he never actually lived in the unit.
An economist might agree, as basic economic theory tells us that supply and demand are inversely related. So, as the number of homes a celebrity owns increases, it stands to reason that a buyer should place less of a celebrity-status premium on any particular of the celebrity's properties. But it isn’t always that simple—one could travel down several consumer theory rabbit holes. Is the property substitutable with nearby properties? Do celebrities commonly live in the area? Do the purchaser and seller have asymmetrical information about the celebrity? Is the purchaser in the celebrity’s typical fan demographic? Is the celebrity a one-hit wonder who will soon fade away? These and other questions pose tricky valuation problems.
All told, it appears difficult to establish a consensus regarding whether and how much celebrity status affects a home’s sale price.
Continue the discussion on LinkedIn: How do you view the “celebrity enhancement” valuation theory?
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By Ryan J. Voorhees
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