When sufficient data is available, paired data analysis can be utilized as one of the most persuasive tools in a Comparative Market Analysis.  Paired data analysis can be broken down into two categories: Primary pairings (pairs of sales that are identical except for one component) and secondary pairings.

Primary pairings should be used first and carry the greatest weight.  An example of a primary pair would be the sale of the same property over time.  If a house was sold twice within a 5 year period, and both transactions represented an arm’s length transaction, than changes in price would reflect changes in localized market forces during that time.

LOOK BEYOND THE NUMBERS IN DETERMINING VALUE

Be sure to investigate whether prices reflect the behavior of a typical buyer and seller in that market area.  Check for conditions of sale, buyer/seller motivation, favorable financing, and property rights sold.  Besides the bundle of rights, people may purchase additional rights towards personal property, rights to sell, purchase, or manage other homes, or even other business ventures.

If there are multiple elements that warrant adjustment, then different primary pairings may be used to isolate these elements.  Judgment is needed in determining whether adjustments from multiple elements can be isolated and affect the purchase price in a linear fashion.  Care must be taken to ensure that adjustments are supported by market evidence.  Oftentimes, only qualitative adjustments can be made in the absence of market data.

DUE TO MARKET INEFFICIENCIES, QUALITY DATA IS SCARCE

Though theoretically sound, the main issue with this form of analysis is that the required data is rarely available.  An exception to this rule would be in analyzing market data in regards to changes in market forces.  This constant quality methodology is used by influential house pricing indexes published by the S & P (Case/Shiller) and the US Government (OFHEO HPI).  When there is limited data, one can still use this technique for certain adjustments and use secondary data to verify the likely hood that these adjustments are accurate.

Photo Credit: StuSeeger - CC 2.0

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Tags: case shiller, OFHEO HPI, property valuation, real estate, value

In more than 15 years in the financial services industry I worked with many different investment theories and with almost as many different kinds of investors. Some were extremely conservative and would only invest in bonds or CDs while others were aggressive speculators dabbling in various options strategies or betting on the futures market. There were the technical investors with their charts and graphs looking for trend lines and breakout patterns and those who followed the fundamentals such as the earnings and growth prospects of various companies. What stood out for me, however, were the stock market investors who favored growth or value. A growth investor would seek out companies that had the potential for future earnings growth, and therefore, price appreciation. The value investor would search for companies that were undervalued by the market with the idea that at some point the market would recognize the discrepancy and the stock price would rise.

While both investment theories were valid, market conditions had a tendency to favor one over the other at different times. Within the industry we were constantly on the lookout for a change in the current trend. Were we in a growth phase or was the trend turning towards value? An investor who spotted the change in trend at an early point could shift strategy and benefit from the changing climate. However there were many who could not spot the change until well after it occurred and were always chasing the market after it had shifted. A bull market run up in the stock market didn’t end gradually, it usually ended with a speculative blow-off. Inexperienced investors would jump in and the end of the bull market cycle and bid prices up to unreasonable levels. The rationale was that “it was different this time”, “it’s the new economy”, “old rules don’t apply anymore”, and hearing statements like this was usually a signal that the pendulum was about to swing back in the other direction. Most bull markets would end with a correction where prices would fall a bit and start moving up after a period of time. A much steeper drop, such as the 1987 stock market crash, usually followed a major market run-up. Novice investors would run from the market with their tail between their legs vowing that they would never buy a stock again. The value investor loves a market decline. This is where he could step in a buy solid stocks that had been oversold and suffered a price drop that was below the theoretical value of the company. These bargains could be scooped up and held on to until the next rise in market prices.

Real Estate Market vs. Stock Market
In comparing the real estate market to the stock market you have some very significant differences. The stock market has almost instant liquidity, you don’t need to advertise your stock or list it on the MLS and wait for a buyer. A stock doesn’t have carrying costs, mortgage payments, vacancies etc. What the real estate market does have is the extraordinary power of leverage. Through the use of a margin purchase you can obtain a maximum 2 to 1 leverage on a stock but in real estate a 5% down payment gives you 20 to 1 leverage. This means that if you put 5% down and your property appreciates only 5% you have doubled your money!

The parallel that we can draw from the stock market is that the bull market in real estate has peaked and we definitely saw it end with a speculative blow-off. The wanna-be investor cashed in his home equity and used easy mortgage money to buy investment property because, after all, everyone knows that real estate always goes up. This was what Alan Greenspan once called “irrational exuberance” or a frenzy of speculation. Prices were bid up to unsustainable levels and there had to be a correction in the market. Where are all of the investors and agents who claimed that it was not a problem to have negative cash flow because you were going to make so much more in appreciation? Perhaps they realize now that what they were touting wasn’t investing but speculating. These inexperienced investors are being forced out of the market, many of them never to return.

Cash Flow is King for Value Investors
The value investors are now able to come into the market and find properties at bargain prices. Cash flow is king once again and built-in equity is paramount. The current glut of unsold homes will eventually be sold and the market will return to a level of sanity we haven’t seen in a while. The get-rich-quick schemer will find a new fad to throw his money at. The savvy real estate investor will buy properties because they make economic sense, not because he is speculating on price appreciation.

What we can learn here is that while every type of investment has its’ own unique characteristics, they all share some similarities. The most notable common trait is the human element. When greed overtakes sanity and reason you will find people making rationalizations to justify their behavior. All of the excuses as to why this market is different are your signal to head for the exits and wait to capitalize on the change in the trend.

The poet, novelist and philosopher, George Santayana, said it best:

Tags: bull market, cash-flow, Economy, growth, real estate, real estate investing, stock market, value

Starting today, Zillow is allowing its users to get their say in what homes are worth by allowing them to enter their own price estimates alongside the site’s proprietary Zestimates. Apparently the move was in response to feedback from the users of the site.

I’ve heard much debate about the accuracy of the Zestimates, both online and off, and I believe that this is a good move for the company. The addition of a new set of “Owner Tools” allows property owners to confirm ownership, edit their home facts, and lastly, create a price estimate and make it public. As public records aren’t always accurate or up-to-date, allowing owners to share information about remodeling work or simply correcting inaccuracies will help to improve the usefulness of the site — something we were hoping for back in April - see post: Top 7 Coolest Real Estate Web 2.0 Sites.

As many of you know already, we partnered with Zillow a few months back to provide their Zestimates right here on BiggerPockets!

Tags: comparables, comps, home, homevalue, house, prices, property, Real Estate Websites, value, zestimate

I’m going to try a new feature here at Real Estate Investing for Real: Real Estate Vocabulary. This feature will look at different concepts in real estate, and explain what they are and why they’re important. The first concept we’re going to cover is Economic Obsolescence.

Otherwise known as Social Obsolescence, economic obsolescence is when the value of a property decreases due to external factors in the neighborhood or immediate area. For example, if the local airport adds a new runway so upon takeoff and landing, airplanes fly directly over your home, the value of your property is likely to fall.

Other possible causes include changes in zoning, recession, adverse traffic changes, freeway construction too close to the property, and loss of major area employers.

The key here is that these changes are irremediable; no matter what you do to your property, these outside changes negatively affect your property value. Appraisers consider economic obsolescence when determining the value of a property.

This is one of the factors that the online home value engines often fail to, or simply cannot consider, when evaluating a property.

Tags: economic, flight, homevalue, neighborhood, obsolescence, patterns, value

We at BiggerPockets.com are excited to announce that we’ve joined forces with Zillow.com in an effort to continue to bring helpful tools and resources to the real estate community. Today we are launching a new tool Powered by Zillow, to help users determine the value of their Property as well as find comparable home prices. (See: Press Release)

By going to http://www.BiggerPockets.com and entering any U.S. address in the Property Values & Comparable Home Prices box, or, by going directly to http://www.BiggerPockets.com/homevalue/ users can instantly find out what their home is worth, see what properties in their neighborhood are worth, view a map or satellite view of their property from Google Maps, and find comparable home values.

The folks at Zillow have been very helpful to us, and we’re excited to be working with them.

In the upcoming months we will continue to bring innovative and useful tools to the real estate world. Stay tuned!

Tags: biggerpockets, home, house, real estate, Real Estate Investing, Real Estate Websites, realestate, realestateinvesting, value