Ever wish you had a quick back of the envelop method to value a house and tell whether is was priced right? Well, I’ll give you one that is really easy. A realtor who is trying to sell me a condo sent me an email regarding the following great deal:
“The unit is right on ABC Springs Rd., the first condominium on the right called ABC Place (backs up to a beautiful nature trail). Probably will ask about $159,000 I don’t know whether you would be interested or not but it will probably go fast because it’s priced well below the original asking price.”
Whoa! Where do you start? Easy; let me teach you a little trick to figure out the relative value of a home. This works for most areas as it contains all the historical housing data. Don’t get your emotions going or even listen to what the person selling the place tells you. They’re biased. You need to make a wise decision.
Okay, so here’s the formula:
A Home is worth (fairly valued) at 100-120 x the going rental rate. So, lets do the math with a little quick division.
$159,000/100 = $1,590 per month. or $159,000/$120 = $1,325
So, if similar properties are renting for $1325-$1590, this place may be worth considering.
In order to find the going rental rate, simply go to a place like rentals.com or your local paper. I did this and found similar properties are renting for $900 per month.
So, that property is still way over valued at $159,000. But you’d never know that if you bought into the idea that it was such a good deal or even a steal as it is priced at a 30% discount from it high.
So, don’t get caught up in the hype. Just do the math and be disciplined. There will be some great deals. But you will need to apply fundamentals. Everything else is simply noise. :)
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It seems so rare that people actually consider the fundamentals like you’re doing here. The housing bubble was based in large part by the fact that people like your agent hyped up the price by comparing to other houses rather than a good baseline and they are still doing the same thing even now.
While ignoring the fundamentals, people assumed that there was no bubble because the housing market was perfectly efficient since the prices seemed to be very reflective of the value. To illustrate this it is said that if a 28 oz. bottle of ketchup sells for exactly double the price of a 14 oz. bottle, the market must be perfectly efficient yet nowhere in that pricing is the true value of that bottle.
Anyway, this isn’t exactly on topic but I was thrilled to see someone writing about the fundamentals of pricing for once.
We had a major bubble here in FL. Now, some 3 years later the foreclosures are piling up and prices are falling. So, a lot of people that bought 6 months ago are now saying “Why didn’t I wait?” because someone across the street bought the same house for 15% less. If they just applied this little principle. I’ve learned or at least it seems that most people are very reluctant to accept the 100-120 multiple. Why? Because it’s hard to admit that most of that equity was fictitious. It’s really hard to find a real estate agent who will act as a fiduciary. The “good news” is that the younger generation will actually be able to buy a home now or soon.
There are many things contributing to the overvaluation. The mentality of prices going up continuously, the cultural push to own a home, the push by the many institutions profiting from sales and even the psychological urge to “build equity”.
Agents are generally there to make a buck, which means they want all houses to sell for more as they get a fixed % of sale and could care less about whats best for the buyer. Until prices reflect true value more people will go to renting.