I wanted to share a recent call from my friend Victor in Florida.  He was there after a recent move from Washington DC and he wanted my opinion about how to evaluate property there.  This is not so easy.  First, I was a long distance from the property of interest – never a good idea.  Second, there is a huge glut of property on the market in Florida.  Finally, Victor was an emotional buyer.  He was likely to assign a higher value to a property simply because it had an appealing water view, or his decorating taste.

This clarified for me the difference between value based on what an investor might pay for the property and what an emotional buyer might pay.  The difference is important because when it comes time to sell the property again, you increase the pool of buyers if investors see value too.  What I explained to Victor was that he might fall in love with a property and pay full asking price just to assure himself that the sale would be completed.  However, as an investor, he would really need to know the amount of rent and net income from the property in order to properly value it.  Investors buy future income streams.  I reminded Victor that money was very portable.  People take their money all over the world to buy real estate based on their perception of the deal, and the value.  Therefore, I told Victor to study his local rental market to learn what he might expect to be paid if he had to move back to DC and lease his property.  He would not want to have a $2,000 per month payment and only be able to rent the property for $1,000 per month.  In this case, his emotions had him pay close to double what the intrinsic value of the property would be worth.

I told Victor that this was OK and that most homeownership fits this scenario.  However, it is really important in difficult economic times to recognize what decision you are actually making – the decision to pay more for the property than anyone else would give me as a tenant.  If you are going to stay in the property for the rest of your life, like Victor, it probably does not matter much.  It is also hard to separate the emotional value of the property from the brick and mortar value.

If you want to discuss the value of your potential real estate purchase, send me an e-mail.

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