Real Estate Valuation

by Mr. Cheap


I was recently up at my condo (there have been problems with the fuse box, the dryer keeps blowing out fuses) and I got talking to one of the neighbours I’ve seen up there a few times. He was quite interested in what I’d paid for the condo and has told me repeatedly that he wants to sell his 3 bedroom condo (and usually says he wants to sell it to me and tries to get an offer from me).

I’ve avoided the subject in the past, and have just reminded him that I got a really good deal on the condo I bought (which is why I bought it) and that prices in the building aren’t going up quickly (he paid $174K for his 3 bedroom years ago and there are similar units in the building being listed for that now). I mentioned this to him and warned him that it’d be tough to get a lot more then he paid for it from his unit.

Finally he managed to wear me down and I admitted to him that I’d run the number and if I was putting an offer in on a 3 bedroom condo in that area it would probably be for about $140K. At which point, of course, he looked shocked and offended and said “if there was a unit selling for that in the building *I’D* buy it!”.

The joke is, there WAS a unit selling for such a deep discount and it was his neighbour’s! of course, he didn’t put an offer in (I did and bought it).

People often seem to fall in love with one form of valuation and decide that its gospel. If your neighbour got a certain price for their property, by golly that’s what you should get too! Or if an appraiser says your property is worth $X, then $X is the MINIMUM you should accept (even if your property has been sitting on the market for 8 months with no offers).

The way I evaluate a property is much like the violent acres post, I take the rent and work backwards, deducting expenses until I figure out how much cash is available for a mortgage, work out how much mortgage that could afford in the current environment, and hope to get the property for less than that. I understand however, that just because my valuation technique says a 3 bedroom condo in that area is worth $140K, people may or may not accept it.

Ultimately something is only worth what someone else will pay for it (and what someone will sell if for). Given, that people overpay (or sell too cheaply) all the time, even this isn’t even an perfect valuation technique.

People getting locked into the view that there is only one approach to valuation (and they’re angry at anyone who doesn’t use it) makes me scratch my head.

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