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Valuing Real Estate In Extraordinary Times

When you think about it, accurately valuing property is virtually everything to the successful Real Estate Investor. Correctly identifying the future value of your real estate project (ARV or After Repair Value) prior to purchase creates profit potential. During ordinary times the task of valuation is pretty straight forward.

Ordinary Times
Find your available, pending, and sold real estate market comparables, crunch away and arrive at a reasonable price/sqft value. Ordinary times account for +/- 80% of the time we’re in the business. For example, if you’ve been investing for ten years, eight of those years have likely been ordinary times. Prices can move along predictably, rates fluctuate within reason, and supply and demand generally stay in balance. In short, the real estate market behaves as expected.

However, there is a danger in ordinary times. We tend to get locked into ordinary thinking. We are comforted by predictability and therefore assign predetermined outcomes to our real estate investment projects. “I’ve remodeled 3 houses in this neighborhood in the last year and sold them all for $140.00+ per sqft, therefore $140/sqft is a floor for nice remodels in this neighborhood.” This is great assessment….in ordinary times.

Extraordinary Times
In extraordinary times, we often amplify our ordinary thinking. Why? Because its always worked in the past, and as humans, change does not come easy for us. During extraordinary times, however, real estate markets don’t behave as they used to. Supply grows while sales slow, interest rates sometimes climb unexpectedly, foreclosures increase, days on market increase. Uncertainty breeds fear and fear influences buying habits. Big ticket items (homes and cars) are the first to be put on hold. Very quickly, it seems, our market goes from predictable to unpredictable, reliable to unreliable, from ordinary to extraordinary…then the music stops.

If you find yourself in this predicament, especially given the extraordinary events over the last month, the most crucial task you have as a Real Estate Investor is accurately pricing your current projects and selling them as planned. Easier said than done, I admit.

How do you determine Value in extraordinary times?
The hard truth is you can’t. Sorry. Remember 9/11? What was the real value of Austin real estate on 9/12…10/12…. The market effectively said, “Hey everybody, things are about to change for awhile, I’ll get back to you in a few months with details.” Successful Real Estate Investors had to keep their cool, respond with sensible incentives or even price reductions, and make the market perform at some level. When it did, we then had a glimpse of where the new value floor was. Of course, its well advised to avoid selling anything in extraordinary times. Buy Low and Sell High is always best, however if you are a full time Real Estate Investor, you may not have this luxury. You will most likely have property for sale during ordinary and extraordinary times. When the music stops, successful real estate investors must respond quickly. If you must take a loss, take it and put yourself in a position to take advantage of the new pricing levels being established. Take the loss and make it back on the next one.

Final Thoughts
In ordinary times, we look back 3-6 months to determine value. This is ill advised in extraordinary times because the rules change. Past sales occured with buyers who didn’t have extraordinary events on their mind when deciding to buy. They bought during ordinary times. If we base the value of our real estate project on decisions made in ordinary times, we’re potentially pricing ourselves beyond the capacity of the current market. After all, if the market is falling, no one knows to what level it will fall. With this in mind, we must price aggressively and sell.

Now with an Example (Extraordinary Times)
If I have a completely remodeled home priced just below all other comparable remodeled homes in the area, it should sell. If it’s shown 5 times to active home buyers and does not produce an offer, I WILL lower the price (in extraordinary times, usually by 5%-7%). If it sits for more than 2 weeks and 3 more showings, I’m dropping the price again. At some point the buyer will buy. If I loose money (and believe me I have), I will shoot to make up the loss on the next deal (usually I have, but not always). In this scenario, the market spoke. It may not have been what I wanted to hear, but indeed it spoke, and one of the most important goals in real estate investing was achieved…..Liquidity.

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