Real Estate Valuation Methods - YouTube

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!