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.
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