Real Estate Valuation Methods
Articles,  Blog

Real Estate Valuation Methods


Welcome to REITV. And this week we’re gonna be talking about something really important in the real estate world which is how do
you value a property? How do you evaluate a property? And you know what, there’s gonna be different methods for doing that depending on where we’re at in the market cycle. Is
the real estate market in a bubble? Did it just pop? Are we in a trough? Is it in a comeback? That’s gonna play a huge factor. In this video we’re gonna explore the two major methods for how we evaluate properties. How, Megan, do you know if a real estate property is worth investing in or not? What would make it a good deal or bad deal? Well, if it’s
inspected and if it’s certified by somebody. I think you need to investigate first what
is the place and depending on that and the information that you get, you will be able to know. What is a property really worth? Well, I’m gonna tell you right now it depends on where
we’re at in the market and there’s two different major methods that you wanna
be familiar with. And I’m gonna share them with you right now. First of all, when
we’re talking about what something is worth, let’s get some of the facts straight. Real
estate over time always does WHAT in value? It goes up in value but I think we’re all
pretty clear that it doesn’t work this way and let me draw it a little bit different
here and exaggerate this drawing. Real estate over time has these things that we call bubbles and it has these things that we call troughs and I wanna give you a little bit of history
on this because you’re gonna evaluate your properties different in cash flow markets as you are in these troughs. And I want to throw out this little disclaimer: with the
right strategy, you can make money in both of these markets. If you got the right strategy, it doesn’t matter what the market’s doing, but you do have to know how to value a property. So real quick little history lesson is right now if you’re taking a look at the great
recession that America is in right now, this is a pattern that has happened before. Every 80 years, we have this market crisis. Last time it was called the Great Depression, happened in the 1930’s. When the stock market fell apart and real estate follows hand-in-hand with it, the real estate market fell apart. The economy can’t sustain building new homes. So what ends up happening is we experience a crash, things hit this low. But I want you
to understand something: You can’t stay here very long in real estate. It’s very predictable. Population continues to grow, people make babies, and after maybe a few years, it’s
required for us to start building again and that’s what brings us back into the market. Now real estate moves slow. Every 80 years, we have a major trough but every 20 years, we’re experiencing some type of recessional trough. This is important to understand if
you’re really wanting to understand how to value real estate in these markets. Now just a fun little bonus side thing, population was growing around 3.6% during the Great Depression. And it took five years for the market to recover. Meaning, five years of that kind of growth
rate and we had to start producing real estate. So even though real estate was at a low, it
was forced to come back up to what we call the rebuild value. That’s what this line
represents right here. Now this represents the previous artificially inflated values
and down here represents these troughs and these lows. We’re at a really interesting
place in the economy right now where we’re in the middle of our recovery. It’s probably
one of the best historic times to be in real estate than we’ve seen for 80 years. Now,
let’s just talk briefly about what you do and how you value properties. These bubbles… we’re gonna use a value method called CMA, stands for a Comparable Market Analysis. And what we’re doing during these cash flow markets is you are interested in buying a
property and using well, my approach to real estate, my formula, I don’t feel good about buying a property unless I buy it with a… with a huge equity position, a huge discount. By the way, another little bonus that’s what Rockefeller did during the Great Depression. Five years later when the values came up he was able to sell off his real estate and he became America’s first billionaire. So the Warren Buffetts, the Donald Trumps, the modern day very,
very wealthy, they’re using these strategies right now.
What is a Comparable Market Analysis? I’m interested in buying a house and the CMA basically says go back in the last six months. Find five or six nearby properties that are similar
in size, age, bedrooms, bathrooms, features, lot size, and use a system that most realtors have access to through their… through the multiple listings service – the MLS. You can select the five best properties and compare them to the property that you’re looking at buying, and it will usually
spit out some kind of thing saying, “Well, these five properties in the last six months roughly sold for $200,000 and you’re buying this for $160,000?”. Yeah, that’s a good
deal. I’ve got roughly $40,000 of equity. Now does it mean that there’s $40,000 of
equity? No. There’s only one way to know that. A home is only worth what someone’s willing to pay for it. But if you’re wicked fast and you know how to find these really good deals, then you can substantiate that valuation. You can substantiate that equity. At least get as approximately as close as you can through the CMA.
Now what do you do when we’re in these more tricky markets where we’ve got these
troughs? We… this isn’t really drawn to scale. We spend 80% of our life here in these building bubbles, we spend about 20% of our life in these recessions. Well, I’ll tell you right
now that this right here is where all the consumers love to chase real estate especially right here, the skeptics always getting right there in the game, kind of a funny thing.
But this is when the wealthy will buy the most amount of real estate and the problem is you can’t use a CMA because remember, it’s talking about what we’re selling
in the last six months. Well if I’m buying a property right here in the market, then six months ago, things were on the decline so it doesn’t look good. Similarly, if I’m right
here in the market, I’m in a re-emerging market so I’m always chasing the market;
so CMA’s don’t work! So what do you use? You use what is called a rebuild value. I
buy a property, for example in Phoenix, for $130,000 and it cost $210,000 to rebuild plus Iand, well there’s a… there’s a discrepancy of roughly $80,000 right there. That rebuild value that the insurance company gives me which is based on “Hey, if this thing burnt down today
what would I have to pay to rebuild it?” gives me probably my closest guess of not what’s it worth but what it will be worth in the near future. Why? Because we know the population like we talked about is driving the values at least back up to the rebuild
value. And so when I go into equity growth markets which is what I call these as opposed to cash flow markets, I’ll buy these homes at these huge discounts but not based on today’s value, based off of what it will cost to rebuild. And I know from history I don’t have to
sit there very long before I can capture often a very sizable profit. One last side interesting bonus note. During the Great Depression, population was growing at roughly 3.6% like I said; right now it’s growing at roughly 1.8% which is half. And that means that the recovery is taking twice as long. Right now, we’re 6, 7 years into
that recovery and so there’s only a few years left depending on what market you’re in before the market has to go back to that rebuild. It’s already happened in some of
the markets I’ve been buying in and that’s where I’m making these really historic huge gains. That’s why it’s such a great time to be in real estate right now. But just quick recap: CMAs are what you use in cash flow markets, normal markets, where we spend 80% of our time. And in these equity growth markets, we’re using the rebuild value that
you would get maybe from an insurance company to give you the closest idea of what this
will be worth when real estate goes back to just building homes normally. Hey! Thank you watching REITV. If next you would like to learn how to make money in real estate, then
click the video up here. And if you’d like to learn the very best markets to invest
in, then check out this video on the site. Other than that, don’t forget to Subscribe
and leave you comments below. See you next week!

37 Comments

  • Kalenn Krohn

    Excellent video. I'm your wife and I still never understood how to value a home in an up and down market. Awesome info.

  • Luke Smith

    Really informative! Im  currently 25 with a degree in accounting and looking to become a real estate appraiser. Do you think I can make a suitable living focussing  on this career given current and future market conditions?

  • kevin3003

    This was a great video. The only caveat i'd add though is that when evaluating a property using the rebuild method, it's important to take depreciation of your subject property into account. For example, if you are trying to value a 50 year old house you need to determine an appropriate level of depreciation because it is inherently going to be worth substantially less than a brand new house with little to no depreciation.

  • Jason Hockly

    As a professional valuer your method does not work for most of the western world. The markets I work in rarely ever sell higher than their "rebuilt value". So be very careful educating people. What about death rates? Population can decline. You can still use a "CMA" in a bust market to tell you what the value of a property is. What about the effects of interest rates on property values? or rent levels? Rebuilt costs can also go down?

  • Al Mughal

    I am a financial advisor with a 10year plus experience in the UAE property market, Dubai to be specific, it has a reputation of having a cycle of ups and downs after every 5 years and now is the down time on Dubai until a few events take place which are signed by the government to be launched or to happen in the near future. It has a history of making people millions of dollars in a very short time, having said that, I am an experienced guy in the financial industry in UAE, being in the mortgage industry I have adopted the nature of the market and its highs and lows, what triggers it and how to tackle it with taking extra measures in the risk area by evaluating the property using the financial opinion on the collateral and the market position on the collateral. Which is what every international investor will die to have, which is called a promise to make a profit in the near future. Which will of course be calculated and presented by using all my inside resources.

  • Nathan Montgomery

    I live in the salt lake area and I am looking to move down to Provo for school in the fall I am extremely interested in real estate investing. I would like to meet your team if its posable and maybe get some mentoring. I have no desire to be a burden but just to have some one to ask questions to.

    thanks for the video.

    [email protected]

  • Cliff Richard Arnejo

    very informative thank you very much for sharing your knowledge. You are such a beacon in light of the darkness

  • Rasma Bluzmane

    You had a good life coach at the age of 23. How did you afford one? Would you say that paying for one was perhaps the best investment you have made?

  • Cherryka 213

    amazing very inspiring videos! thank you very much ….
    QUESTION…. what's the ideal "dream team" I should get together ??

  • John lunch

    Overall good but you comment including Warren Buffett struck me as odd unless I misunderstood. He does not focus on real estate at all

  • Reef Dweller

    Amazing…This valuation method is almost like the Enron deal…..Let's work on this new method…Let's call it 'hypothetical future value'……

  • RANGE 1 PROJECT

    I like your videos. You seem down to earth and genuine compared to a lot of others I see on youtube that come off as kind of sleezballs. Plus you have mentioned TN a few times for investment which interest me as that is where I am at.

  • Stephen Miller

    Equity Markets synonymous with Fix n' flip and whole sale strategies, Cashflow markets synonymous with rentals, correct?

  • Geoffery Simmerson-Clapper

    Love your vids have only found them in the past 2 weeks. I do have a property with good equity, my question is how do I find lower valued properties. The owners selling want top price. I'm here in uk

  • Giovanni Galvan

    Hey Kris, I'm a 17 year old who happens to love the idea of taking risks, business wise, because I know even if I fail I just learn more. Only problem is I don't know where to start I'm hoping your videos will help I'll be studying each and everyone of them! So far you give such detailed information and I thank you for that! I've also sent a LinkedIN request. Hope to learn more!

  • Fabian Andino

    How do you figure out if it’s a cash flow market or an equity market? and where the market is in the cycle? 🤯🤕 I don’t want to use the wrong valuation method.

  • Licho Tropical

    Buy as cheap as you can at any time so you can sell and make a profit at any time.

    There you go folks, best advise you will ever get on the internets.

Leave a Reply

Your email address will not be published. Required fields are marked *