How Real Estate Prices Are Determined
Let's Start With a True Story:
I recently publicized a multi-family home of five apartments for sale.
The price I stated was lower than the actual market value
and I presented the asset to an investor, offering a net annual return
of 15% from rental income, plus a return from an expected rise in value
of the home.
The investor, who thought he knew a thing or two about real estate
investing in the US and who had already purchased another asset
and had seemingly been stung by a loss, replied:
"Either you've been duped or you don’t really know what is the real value of the asset!"
The investor checked up this asset on the famous Zillow site and saw that the asking price was significantly lower than what I had publicized. He also saw that the asset had been sold a few months previously for an even lower price (significantly lower!).
Why was he mistaken?
His first mistake was in misunderstanding the market. Instead of checking up the "zestimate" - (Zillow's estimate of the asset's worth), he just read the heading which listed the selling price...
In addition, he was also mistaken as to the correct valuation of the property.
Zillow provides a price estimate based on an algorithm that compares this property with other ones in the same area that have recently been sold or which are listed. An average price per meter is then calculated and thus the estimated cost of the home is fixed. The algorithm doesn't take into account the physical state of the asset, nor how much more capital is required for renovations to make it habitable.
The More Reliable Indicator
US real estate agents work with a more reliable guide, the CMA, or Comparable Market Analysis which compares the property for sale with similar ones in the same area which have recently been sold or are currently listed. Adjustments are made depending on the condition of the property and the cost of any repairs or renovations that may be needed.
The CMA never values the absolute price of the property, rather it proposes a minimum price (below which the seller will make a loss) and maximum one (above which the buyer will make a loss), as well as the median and average prices in the area.
How Do We Know the True Cost of Renovations?
Before we purchase any real estate, we hire a licensed and professional company to carry out an extensive appraisal. We receive a 20-30 page report that provides minute details on all aspects of the asset (from the condition of the roof to leaky faucets).
Do you want to find out more and hear about potential real estate opportunities at competitive prices?
Do you want to see a real CMA or a Property Appraisal report?
Do you want to know how the true story at the beginning of this blog ended?
Send an E-mail or call Tsurel Estates.