Valuation
I was recently up at my condo (there have been problems with the fusebox, 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.
September 18, 2007 at 9:18 am
I evaluate rental properties the same way. The property has to be cash flow positive from day one.
September 18, 2007 at 9:31 am
I wonder, how would you evaluate a property (or would you?) if you were buying it for yourself to live in? I’m of the opinion that a PR is not really an investment so I likely wouldn’t evaluate it as such but it does in a way make sense to do so by comparing it to rent and the opportunity cost (i.e. what you really could be doing with the down payment and subsequent savings vs. renting). I would love to see a pure dollars valuation on PR.
September 18, 2007 at 9:48 am
Congrats on the new purchase!
I think a lot of people value their real estate in a way that makes them feel good. I’m sure there is a term for it ( “optimistic insanity”? ).
It’s like golf - u ask people what they shoot and they give you a number which is probably one of their better games (and with a bit of cheating to boot!) and not their real average. Same thing with golf drives - I’ve played golf with guys who can barely hit the ball and get pissed when they don’t put it 250 years down the fairway everytime, and the occasional time when they get a lucky hit they act like that’s the way they normally hit the ball.
rose coloured glasses, blinders on, living in a dream world - life can be pretty good if you don’t have to deal with reality.
Mike
September 18, 2007 at 9:57 am
Telly - that’s an interesting point. Personally I never thought of pricing a house that way if I was going to live in it - I definitely spent a lot of time trying to get a sense of the market to make sure I wasn’t overpaying (relative to the market at that specific time).
If there is a big discrepancy in the renting/owning equation (ie Vancouver) then it might be worth thinking about since you could realistically accumulate significantly more wealth renting instead of buying which is not normally the case (normally I would guess it’s a tossup).
Mike
September 18, 2007 at 10:23 am
telly: I’d probably start with what I’m paying for rent (currently $500). There’s no way I could own anything for that kind of money, with expenses factored in it’d be worth about $50K of property. How I do, kind of factor it in, is I’m thinking about buying a place, renting out rooms, and living in one of them myself. From this perspective, I can buy a property that’s $500 / month “under water” and view it as that’s my rent payment. I’m ideally looking for a place that’d be around $50K / bedroom (which I’ll then rent out for $500 / month each and live in one). This may or may not be doable (but in the worst case scenario I start looking at condos in the same area where I bought my first one again)
mike: What purchase? I didn’t actually buy anything, I just talked to a guy about the price of condos in the building where I already own. Or did I misunderstand? I agree with the golf analogy, its funny what people think is the “proper” outcome (even if it only happens VERY rarely).
September 18, 2007 at 10:58 am
Sorry, I misread the chronology.
I take the congrats back
Mike
September 18, 2007 at 12:45 pm
Actually, I kinda thought you bought something as well but forget (good thing) to congratulate you. Is your condo a 3-bd? Is that why we got confused?
MC, when I hear some of the outrageous prices being paid in Toronto I think it is overvalued (i.e. big discrepancy between owning / renting) but it might just be that certain areas are in high demand and it’s those houses that are going for HUGE bucks. The idea of paying $600-$700k for a 3 bd semi is mind boggling to me. I have friends that have gotten into bidding wars in Toronto. I’m shocked!
September 18, 2007 at 1:14 pm
Telly - $600-700k is definitely in a nice area and those are probably the areas where you might be better of renting.
You also have to remember that semis are very common in the downtown core (ie 80% of the houses) so although detached houses will be worth a premium, it’s not necessarily that much since semis don’t have the same stigma they might have in an area where they are the exception rather than the rule.
Mike
September 18, 2007 at 6:35 pm
FP, I like the term you coined “optimistic insanity”
It’s true people like to feel good, and that does not include admitting that they got screwed when they bought their house. You can bet that if he had paid $70 for it there would have been some gloating.
September 18, 2007 at 7:33 pm
Thanks WC - I think that it’s generally ok to live in fantasy land for some things. If you are in a house that you aren’t planning to sell for a long time, does it really matter if you have it valued at four times the actual value?
Mike
September 19, 2007 at 9:41 am
My condo is a 2 bedroom (but there’s a solarium could use as a bedroom if you didn’t like the person living in it very much).
I lucked out that in the area I bought, its actually possible to get a condo that’s workable as a rental. In the downtown core, there’s no way you could buy a condo and rent it out and get any sort of reasonable ROI.
I’m kicking the tire of some houses and trying to figure out if renting out individual rooms for $500 / month short-term would give a decent return (and haven’t been able to find anythign that would work for this yet).
September 19, 2007 at 1:52 pm
Just had a job interview in Toronto. If we make the move, maybe you can kick out your tenants and rent to my husband and I…
September 19, 2007 at 2:20 pm
telly: You should have let us know you were coming to T.O. and we could have gone for a drink (I’m actually getting together with Mike, so it would have worked out perfectly).
Good luck on getting the job!
September 19, 2007 at 2:42 pm
We headed straight out to Collingwood (the ladies) and Wasaga (the dudes) after the interview but maybe next time!