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Understanding Real Estate Values

In this video, I talk about Real Estate Values and try to make sense why some people think it’s ok to pay way more money above the listing price for some properties and why, in some cases, that makes total sense.

Transcript:

  • Hey everyone, welcome back to my channel. Today we’re gonna talk about Real Estate Values and try to make sense why some people think it’s ok to pay way more money above the listing price for some properties and why, in some cases, that makes total sense.
  • Intro
  • It seems that the real estate market is tough everywhere in Canada, everyone is paying tens or hundreds of thousands of dollars above listing price especially in major cities like Ottawa.
  • Ottawa has seen a massive increase in value over the last 3 years and it’s still going up. It’s still a seller’s market out there.
  • In a seller’s market, buyers tend to overbid by a lot and when we try to rationalize why they do that, some sales just do not make sense at all. At least from our perspective.
  • After I get over the initial shock, the more I look at the numbers and trends, the more I see that some things make total sense.
  • How, you ask? (How did you know?!?)
  • Because there are several reasons and factors that each unique buyer is considering when planning to put an offer on a property. Ultimately, they look at the value it will provide them in the end. It’s similar across the board, whether they are the end user or an investor.
  •  Looking at Ottawa, we still see deals that are well above asking, but in general the market has continued to inch higher and people are willing to pay within that new market value.
  • Before we dive into those factors, firstly, let’s define what a market value is: Market value represents what someone is willing to pay for an asset. It’s not dependent on the price one paid for the materials and the construction of that asset.
  • For example, and we’ll keep it simple, you spent $500k constructing a house that in your opinion is the best house ever. If you plan to sell the house, you are probably going to list it for over $500k to cover your expenses and profit a bit. But if the market is only willing to pay up to $300k for that property, then that property is only worth $300k. That is that property’s market value. The market dictates what something will sell for. If everyone thinks that the property is only worth that much and is not willing to pay higher than that price, then unfortunately, in my example, you’ll lose money selling.
  • So now let’s get into those factors. You’ve seen the news lately. Most people are compelled to overpay to win against several other buyers competing to get that coveted property. Unfortunately, in this market, there’s definitely less inventory than buyers. This number imbalance definitely accelerated the increase in prices really fast.
  • So, as a buyer, obviously, you’re caught off-guard thinking that a lot of these properties are not worth that much. But that’s because you’re still thinking of the old market value. So what can you do? How can you reconcile that disconnect to what is currently happening in the market to what you were used to? What do you look for to see if it’s worth paying a bit more? Obviously, you should know your limit and what you can afford. But in order to get in, you should know the market and the neighbourhood really well.
  • Let’s look at it from a different perspective.
  • You’ve heard of this mantra “Location, location, location” in real estate. When we talk about location, it’s not just about the city it is in. It’s also about the local communities inside that city. 
  • It’s possible that even in a buyer’s market, some areas will still attract more buyers than others. This can either sustain or drive the prices up in that neighbourhood. Same in a seller’s market. If several inventories go up for sale in that community all at once, then the buyers have more leverage to negotiate. So always ask this to yourself, what’s happening in these neighbourhoods? Are they good or bad? Why does it attract these buyers? Usually it’s the quality of schools, big lots, family-oriented neighbourhood, close to the city centre, etc.
  • Next is the comparables. It is always important to find out the sold history of similar houses in the neighbourhood you are buying in and the turnover and absorption rates.
  • These will give you an idea on whether the house is listed way under market value to attract more buyers and encourage a bidding war or it is listed at market value. Typically, one should look at the trend over the last six months. But in a fast-growing market, sometimes you have to look at comparable properties sold most recently.
  • So what if it’s listed at market value? Why do people still overpay? Some properties need still need a lot of work and yet people go way over the listing price.
  • Well, if like me, at one point in your life, you got sucked into watching one of those HGTV real estate flipping shows, for example, you would know that each show would end with the current estimated value of the home after the renovation. So it really shouldn’t be a surprise that for houses that need repairs, after doing the renos, the value of the home increases. This is an example of what some buyers who “over pay” bank on: The house’s potential.
  • By doing the renos, you are forcing the appreciation of this property. Once your renos are done, the new value is the After Repair Value or ARV for aspiring real estate investors.
  • So like I said above, you should investigate what’s happening in those neighbourhoods. If there’s a lot of growth happening in the area, it instills some confidence on the buyers.
  • In Ottawa, however, there is a lot going on. Lots of growth is happening in the city due to several infrastructure and government programs and plans that call for intensification and affordable housing. Therefore, it is important, especially if you’re thinking of becoming a real estate investor, that you know the local zoning and city development Official Plans. They are important. And in some properties, this plays a big factor on why investors pay a bit more today. Because they know how to get back that money, in fact, lots of money back later.
  • Does it always make sense to pay that much money? No. Especially if you don’t know the potential of the land. But ultimately it depends on what the purchaser is going to use it for.
  • Some buyers, who are end users, think it’s worth paying the money because if they are staying there for at least 5 years or longer and with all these projects going around the city, they would enjoy the new place comfortably while also benefiting eventually from the increase in market value. Eventually, the market value would catch up to their higher purchase price and would balance out. The interest rates are also very low these days so the cost to borrow is very cheap. For buyers like this, what personal value they get from the property sometimes trumps the price.
  • Savvy investors, on the other hand, are different. Some investors think they can make it work financially because they know the full potential of the land they bought. And even in a hot market like this, they can make money. If you’re an aspiring investor, I can talk about that a bit more in private, feel free to reach out to me so I can explain this more in detail.
  • Now, if you are a new investor and you know what I am talking, I don’t think I need to tell you this, but just be careful. Coz at the end of the day, this will fall under speculation and you might lose tons of money. If you are planning to flip properties, make sure you study the fundamentals first before jumping into this type of business. Also, cover all your bases. If possible, start small.
  • In the current market we’re in, the lack of supply accelerates the appreciation of values faster, which I already said earlier. In my opinion, most buyers here in Ottawa, are still rational and conservative. We’ll get to a point when it’ll slow down a bit, everyone’s gonna take a breather, and some will be able to buy at actual market value, rather than a bit more and pushing it further.
  • I think in Ottawa, we are at this point, wherein there will always be something that will happen that will motivate and instill confidence in the buyers within the next few years.
  • For example, in the past, I predicted that the opening of the first phase of the LRT will have a huge impact on the property values in Ottawa. And I was right. I don’t think it is just a coincidence that the seller’s market started around the time. Also, around that time, we celebrated a huge event – Canada 150. We had lots and lots of people from all over Canada who came into the city. They saw how Ottawa is not a really bad place to be in, and therefore, when the pandemic hit, it’s only natural that they all consider Ottawa first.
  • So I guess what I’m saying is, if you think you’ve been priced out of the central Ottawa locations, there are still several opportunities in there. Look for areas with massive potential. If you need some guidance, feel free to give me a call and we can chat about it.
  • Anyway, hope this helps. If you enjoyed this video, please like, subscribe and share it to your friends if you think they will get some value out of this. 
  • Thanks everyone, that’s it for me today. See you next time. I’m done speaking. :) 
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