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How To Get Good Value For Your Investment Part II
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Oct 24, 2005, 15:58
Now it's chart-making time. We list the subject property, and all the other
properties, at the top of columns on a page. On the first line under the
heading, we show the asking prices of any of these properties that are up
for sale. On the second line e write in the recent sales prices, if any.
On the third line we show the value we've temporarily assigned to the subject
property. We leave this line blank for the other properties. Why? Patience.
We've said that you wee walking through the various properties, sizing up the
desirable and undesirable features of each. Now we list those features on our
chart. We make this list as sketchy or detailed as we feel like, bearing in mind
that we're interested only in features that could have a significant effect on
value.
In other words, the important differences between the properties are what go
into our chart. If the quality of kitchens varies sharply from one building to
another, kitchens would certainly be one item on the list. Contrariwise, if all
the buildings provide about t he same parking facilities, you might decide not
to bother listing parking as an item.
The differences you think are important should be listed won the let-hand
side of our chart. Next we grade them for each property: "A" for excellent, "B"
for above average, "C" for average, "D" for below average, "E" for
unsatisfactory, and "F" for non-existent.
Now we get into numbers. Dollar numbers.
That is, we make the shrewdest estimate we can as to how much each difference
is worth by comparison with the subject property. Afterward we'll simply add or
subtract all the value differences to get our bottom-line estimate of how much
more or less each property is worth than t he subject property.
To see how this works, let's take an imaginary situation and work out
the analysis of comparative value. To keep things simple, we'll assume that
we're comparing a subject property with only two other properties, and that all
three are so much alike that we notice only five differences significant enough
to jot down.
The subject property, we'll say, recently changed hands at a price of
$200,000. We assume - just for purposes of our analysis - that this is its
fair market value. The other two properties are currently offered for sale at
$195,000 and $205,000, respectively. We write this basic information in the
appropriate spaces near the top of our page.
Then we turn to the first item of major difference, which might be the
bathrooms. Those in property no. 2 all have two washbasins, gorgeous ornamental
tile, fancy gold-plated fixtures and faucets, and other glittering features we
wouldn't expect in that neighborhood. Hard to beat. So we write an "A" after
bathrooms in the column for property no. 2. By contrast, the bathrooms are about
average in the subject property, so we give them a "C" in that column. In
property no. 3 the bathtubs are cramped and the toilets are inconveniently
placed, so we figure they rate only a "D".
Now comes the question of what these differences mean to the relative values
of the three properties. To get the answer, you must estimate how much it would
cost to upgrade the bathrooms in the subject property to the quality of those in
no. 2. You can make your own estimate or, if you have absolutely no idea, you
can consult a contractor. Just remember, you don't need to pinpoint the figure;
somewhere in the ball park will be enough for our purposes.
Say you come up with an estimate of $1,200 each. This would mean a total of
$3,600 o fix up the three bathrooms in the subject property. You write a plus
$3,600 under "A" rating you gave the bathrooms in property no. 2. Using the same
reasoning, you might guess it would cost $3,100 to make the three bathrooms in
property no. 3 as good as those in the subject property - so you put a minus
$3,100 for the "D" bathrooms there.
Onward! Next item on our list is kitchens. Below average in the subject
property? They get a "D". In property no. 2 the kitchens aren't as classy
as they might be, but we'll give them a "B" because the equipment is newer. In
property no. 3 they've all been remodeled lately. The rate an "A" because
they're as up to date as any lady could reasonably expect.
Now the numbers again. How much would it cost to make the kitchens in the
subject property as modern as those in properties no. 2 and no. 3 respectively?
You decide it would cost $1,900 (mainly for new equipment and cabinets) to
pull the subject-property kitchens up to the quality of those in property no. 2
- and about $4,000 (including extensive remodeling) to put them on a par with
those "A" kitchens in no. 3.
We ran through the other items in the same way. Swimming pool? The subject
property has one. The others don't. The one pool is just about average for that
part of town, so it rates a "C" and the other two properties get "F", of course,
on the line for swimming pools. How much would it cost to put a similar pool in
t he yards of no. 2 and no. 3? Maybe $12,000. So we write a minus $12,000
under those two "F"s.
Apartment heating system? We've noticed that the subject property's units are
chilly on a cold day. But the other two buildings' heating can keep anyone cozy.
So we rate the subject property "E" and the other two "A". Let's write a plus
$4,000 for each of the latter, because a heating-system contractor tells us it
would cost about that much to bring the subject property's system up to par.
Maybe the final item on our list is storage space. Okay in the subject
property, truly spacious in no. 3, woefully cramped in no. 2. But wait. There's
an unfinished area in property no.2's basement. It could be made into three
good-sized storage rooms at a cost of about $5,000. So we give no. 2 an "E" and
a minus $5,000. We have to award an "A" to no. 3 but we have far more storage
space than ay normal resident would need. Subject property receives a "C"
rating.
So now it's a bottom-line time, the moment of truth. We simply add the plus
and minus figures in each column. The answers tell us how much more or less
properties no. 2 and 3 are worth than the subject property. The we can add or
subtract these amounts from whatever value we tentatively penciled in for the
subject property, and the answers give us a guess at the value for the other two
properties.
Having done all this, we still can't be sure that the bottom-line figures for
no. 2 and no. 3 are a good guide to their fair market value. They could be way
off, if the subject property recently sold for much more or much less than it
was really worth. Furthermore, there could be cases where your subject property
hasn't been sold lately, isn't being offered for sale, and thus gives you
no fix on what it might be worth. Even so, the analysis tells you that you'll
probably be getting a better buy on no. 2 than no. 3 if you grab them at their
respective asking prices. This is the main reason for making the comparison. No
matter whether you arbitrarily assign a value of $1 million to the subject
property, or $1,000, you still end up with an idea whether property no. 2
or no. 3 is the better buy of the two.
If you need a more accurate reckoning of how close your figures are to fair
market value, you can fine-tune them by including additional properties in your
comparison - properties that have been sold lately. The more actual sales you
consider, the closer you'll come to figuring fair market value.
In any real-life situation you'll surely consider more than the five
categories of difference we picked out of the air for our fictitious
comparisons. One important category will probably be the relative square footage
of the various properties. This alone could make a surprising difference in
their potential worth.
Square footage is important, because, for one thing, you'll have to
heat it. Fro another, you rent space. People prefer spacious rooms and closets.
So if one building has more usable space than the others, tenants may be willing
to pay higher rents there.
Total square footage can fool you, though. Even though one building covers a
bigger area than another, it doesn't necessarily contain more rentable space.
Maybe the supposedly smaller building has outside patios with each apartment, or
outside walkways between apartments. And maybe the "bigger" building has all
inner halls, which of course must be regularly painted and cleaned and carpeted
although they don't put a dollar in your cash register. In that case the
"bigger" building probably has higher maintenance costs, and its actual rentable
space - meaning potential for revenue - is smaller.
Step it off, use a tape measure, get the blueprints, do whatever you prefer -
but know each building's square footage of rentable space. Start with its total
floor space, then subtract footage that won't produce any income. That gives you
the net space that will bring in all the rent money. If you know the current
rentals you can compute the amount of income per square foot - a useful
yardstick in comparing properties.
Some unrentable space can be made to pay off in other ways, perhaps. Maybe
you can put in laundry machines if the building doesn't already have them. Or
how about vending machines? Is the complex big enough to make their next
revenues worthwhile after deductions for installation, servicing, repairs, and
depreciation? Maybe you can install a coin-operated telephone in a hall or
lobby, of there seems to be demand for one. However, these possibilities
are irrelevant just now. At the moment, you're trying to compare and evaluate
each property's current condition. Its net rentable space is an important
item for your checklist.
I wonder if you're thinking, "Wow! This is an awful lot of comparing and
figuring!" Sure, you'll find it tedious the first time. Bt what's a few hours or
even days of your time, compared with the thousands of dollars you may be able
to save?
Even if you don't follow through with a purchase, making these close
comparisons will give you valuable experience. Each time you do it, your
analysis will be faster and easier. Soon you'll find you can get a feel for
relative values of properties just by walking through.
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