HOW TO VALUE REAL ESTATE

The skill to value something is probably the best skill you can possess if you are ever to stay wealthy, more so today, than ever, as influencers, and paid marketers, completely manipulate prices.

In an ideal Plato’s world, Price is the same as Value. However, in a world where votes are being bought in plain daylight, and the mediocre rules supreme in every industry, price and value can be poles apart.

The aim of this blog is to help you figure situations in life, and in Goan real estate, where value exceeds price.

One side note here before we get into the crux of it (if it ends up being too technical!), is whenever you are offered something and you like that product and want to buy it, ask yourself a basic question to judge its price -> is this product known to the majority or to the minority?

· If its known to the majority, you are likely paying more price than its value.

· If its known to the minority, you are probably still paying a price that leaves some value appreciation on the table.

· If its known to everyone, you are paying a price way above its value.

· If its not known to anyone, you are the person who has to figure its price.

The above will only apply to luxury items without obvious price benchmarking, where the majority still comprises of a tiny fraction of the population, so don’t use this at the general stores next time you are offered to buy a soap !

Let’s value the most common property piece you hear in the North Goan real estate market, a villa in Assagao!

1. Step 1 in valuing something always starts with understanding the maker’s cost.

2. Let’s say this is a 3BHK villa in a gated community of 10 villas on a plot area of 2500 sq. mtrs, with an individual villa carpet area of 2,000 sq ft.

3. For construction cost (note this construction cost will be exactly same all over Goa, whether this villa was done in Bastora, Moira, Morjim, Calangute, or Tivim, the price will be exactly the same!) – 2,000 X 4000 p sq. ft = 80 lacs.

4. Let’s see the other misc. charges around architects, brokers, liaising agents etc, lets assume that this is around another 35lacs. (this cost will differ in different places in Goa but generally will range from 20-35lacs)

5. Now let’s value the plot itself -> 2500 sq. mtrs at an ongoing rate of 80,000 per sq. mtrs in Assagao will be 20Cr. Given you have 1/10th of this your value is 2Cr, plus taxes / brokerage etc for the developer is additional 10% so that’s 2.2Cr of plot value.

One simple way to value will be to add 3, 4 and 5 to get to INR. 3.3Cr and then assign a fair developers’ margin of say 20-25% to assign a price of 4Cr ex taxes to the villa

However, that won’t be correct, why? because you have used a market benchmark wrongly in your plot evaluation. What makes you think the value of this plot in Assagaon is the same as generally all Assagaon plots at INR. 80,000 p. sq. mtr?

If you paid 80,000 per sq. mtr. you can acquire a plot where you as individual are the sole controller, in this complex you do not own your plot outright, you share the decision making between 10 independent villa owners.

So effectively in 20 years when the structures are running down, a redevelopment isn’t just your choice, it will be a collective decision which may or may now be implemented smoothly!

So now this isn’t really a situation where you are getting a 80,000 per sq. mtr. value, because it doesn’t come with independent controlling rights on the plot, we would then put this at an almost 50% discount to say that the value we figured in point 5 above, should really not be 2.2Cr but closer to 1.1Cr.

Hence now the revised price of the villa with the same developers’ margin and other construction parameters becomes closer to 2.9Cr.

Now, the developer wouldn’t care if you argued like this with him on price, because he has obviously paid the full 80,000 per sq. mtr. but he is hoping that his buyers aren’t as discerning as you are and he will let you walk away happily.

For your own sanctity, given he is pricing his villa likely at around 8Cr ex taxes (the going rate for Assagaon villas) – maybe just ask him what are the price components?

Am struggling to figure the costs here if I add up plot price, construction cost etc, to get to why this should be an 8Cr villa, am I missing something ? perhaps you’ve used some high-end designer who charges by the hour ? Response: No we have in-house designers we use or regular 3rd parties, no Sabyasachis involved here.

Ok so no known designers, is this villa using some rare earth materials or build technology that is new in our country driving its price? Response: No, we’ve done it in RCC or load-bearing with same cement concrete mix technology.

Sure, so no innovative construction technology. Is there some cost of your monies, like you borrowed at very high prices to construct this etc? Response: No we did take some borrowing but that was at 18% p.a.

Is there some strategic angle here in the price, like Assagaon rates are likely to triple in the next 3 years, because all NAs will be soon converted to orchards (?!) so you are forward loading that premium in the price? Response: See this is a premium development with high profile people, and I think rates will increase here

How much do you think this villa will sell for in 2 years? Response: At least 10% higher

At this point I recall what my father once said, if you sit at a table of cards, and can’t spot the sucker, you are the sucker ....

Realise this walk out of that office!

Remember valuation has nothing to do with the market. Market only discovers price based on the behaviour of the buyers and the sellers. Price is almost machine generated. Valuation on the other hand is entirely driven by your circumstances. (If you knew the world was ending tomorrow, you wouldn’t buy this villa for free. A bit extreme but you get the point on circumstances!)

In a market, where large sums of money are made illegally, price can way exceed value. In an honest market like some of the European countries where money is 99-100% legally earned, price is almost always in line with value, unless again you go to hubs like London, Paris, where the buyer is willing to pay extra for the bragging rights.

So now let’s play this out further, let’s say –

1. You drove around Assagaon and neighbouring villages in a 30mins radius, and for the life of you, you cannot tell the difference of why Assagaon stands out.

2. Beaches are something you go once in a while, and honestly the reason for your move to Goa is peace and not necessarily beaches, which being honest are at best average.

ASSAGOA

Then suddenly, options like Colavle, Tivim, Sircaim, Moira where there are plots at lower prices all open up.

In fact, if you thought that over time, more people will become discerning and try to think like you about drive distance, the state of the beaches in Goa, and try to prioritise peace ahead of beach proximity, then these other locations will appreciate significantly faster than Assagaon.

TIVIM

In short, when valuing something try to shut down all market voices. Write your needs down and start assigning a sum of money you are willing to spend to achieve each of those wishes, a total of this with a reasonable price paid to the maker for his effort, will give you the fair price.

Again, don’t expect that the developer or any maker will just agree with you and give you the Assagaon villa or any other property at your price, because all he has to do is find that one buyer who has earned his money in a funny way working way less than you have for your money and he will have it sold at his price!

Even if so, long term, assuming our country becomes more uniform in terms of people working equally hard for their monies and everyone’s money having the same value, you are more likely to turn up right than wrong, by not buying overpriced assets today and hunting for undiscovered or less discovered products where value tends to be higher than price. That is how long-term wealth is always created.

In the end, remember that nostalgic sprite ad –

Dikhave par mat jao,

apni akal lagao ….

For the records, we feel for a thoughtfully designed villa using natural materials, and good colour coordination, flow being thoughtfully figured, anywhere in North Goa, Assagaon or Sircaim, Colvale or Moira, for 3-4 BHK on a plot area of 300-400 sq. mtrs. 4-4.5Cr is the fair price.

If then you add significant designing (and this isn't minimalist, wabi sabi, boho, etc with distressed wood furniture, and those typical wooden horses that folks claim were previously at some maharajas home), but genuine hand craftsmanship, where machines were used minimally, and things were made almost entirely with hand with intricate designs using expensive materials, like leather, velvet, brass, shisham, and the likes, all coming together in a crescendo, like Scorsese's movie "The age of Innocence", then sure, pay even 10Cr for it as that is really worth it. it will be unique, and it will be worth a million times more than 10 of such Assagaon villas where each one looks the same as the other....  

Please comment your thoughts on this blog if any!