I last blogged on my search to buy a new condo in November. In early December, I stopped looking for two reasons. The first was the practical issue of just not having enough time to look with the holidays coming up.
The second reason was that vendors continue to believe their condo was worth more than what the market thought. Looking at a very narrow desired price range and in a small geographic zone, we (my real estate agent and I) saw three different places drop their prices after languishing on the market for a long time. I was unwilling to buy in such an inflated market especially with a large supply of condos coming on board locally.
However, as promised in my last update about my real estate search, here is how my real estate agent looks at pricing (any mistakes are my own). My one huge caveat is that this type of analysis is only supposed to give you a rough guide into valuation.
[Related -Defensive Sectors Lead Hesitant Market, But Traders Honor Long-standing Bullish Support]
There are other factors that will play into price (willingness/desperation of vendor or purchaser cannot be captured into a spreadsheet). The primary purpose of this analysis is to see whether the vendor is even in the ballpark and to walk into negotiations with more than "your pricing is crazy" as the primary negotiating point. Without further ado,
- Take the price the vendor purchased the condo for (for new builds, you are looking at price per square foot in the area for a comparable space)
- For each year held by the vendor, add to the original purchase price the percentage of increase/decrease of prices in the MLS zone; make sure that if it is a house, you are looking at housing increase/decrease and if for a condo, you are looking at price increase/decreases in condos only.
- Add to the price the sum of: (cost of improvements)(percentage of return). Percentage of return is, admittedly, a subjective number. However, you can be reasonable about it. For example, my agent attributed the cost of new paint as providing 100% return in one unit since it was done a month before a condo listed.
[Related -Will Janet Yellen's Outlook Prevail?]
(What I have deliberately omitted here is the impact of property taxes on the analysis. Since I am purchaser side, I am not concerned about property taxes on my return on investment. If you are vendor side, you have to add in the effect of property taxes on your return. In jurisdictions with high property taxes or where the province/state and the municipality charge property tax, it takes more to get back to even where the property is being purchased and sold in a short period of time.
The impact of property tax is consistently overlooked in vendors making decisions. It is also, in my opinion, a primary cause of why inexperienced or unsophisticated real estate investors are losing money in the real estate market.