3 Ways to Value Real Estate (LA 802)

3 Ways to Value Real Estate (LA 802)

Transcript:

Steven Butala:                   Steve and Jill here.

Jill DeWit:                            Hello.

Steven Butala:                   Welcome to the Land Academy Show, entertaining land investment talk. I’m Steven Jack Butala.

Jill DeWit:                            And I am Jill DeWit. And we are again broadcasting from sunny Southern California.

Steven Butala:                   Today Jill and I talk about the three ways to value real estate. I’m surprised we haven’t talked about this earlier.

Jill DeWit:                            I know.

Steven Butala:                   This is show 801. And we haven’t talked about valuation. It’s so important, you know?

Jill DeWit:                            I agree.

Steven Butala:                   We’ll get to the meat of it, I guess in a minute. Before that let’s take an interesting question actually from one of our star performing members, Luke Smith.

Jill DeWit:                            Cool.

Steven Butala:                   If I can get everything to work.

Jill DeWit:                            It’s okay.

Steven Butala:                   Yeah, alright.

Jill DeWit:                            By the way, where did he post this question? On our free online community and you can find it on LandInvestors.com.

Luke asks, “I’m okay at selling the smaller dollar amount properties, selling usually a couple a day. Now I want to get good at selling the bigger dollar ones.”

Steven Butala:                   Yeah.

Jill DeWit:                            “My buyer pool is not the right people to buy my bigger dollar ones. I think the right people are people already bought one or many in the area. Maybe even a couple county area buyers who paid and researched the market before buying in the area already.”

Steven Butala:                   What he’s saying is he’s finding buyers who’ve already gone through the motions of researching the area so he doesn’t have to hard sell them on the area. They’re already sold on the are, they just to buy cheap properties from him.

Jill DeWit:                            Right. They bought large acreage over here, they bought large [crosstalk 00:01:30] over here.

Steven Butala:                   And he’s totally right.

Jill DeWit:                            Exactly.

Steven Butala:                   There’s a reason he’s good at making so much dough.

Jill DeWit:                            “They already know what the area’s value is. There might be some developers in that list too.”

Steven Butala:                   Exactly.

Jill DeWit:                            “I want to mail them and pitch them.” So here’s the question, “What is the 80/20 or the Pareto principle to hit them? What price? What time limit? What type of properties? What size? The same type recent buyers for lots of money, right? Or are people who paid less more astute shoppers and more willing to jump on a new deal? If I have a five acre and they just bought a point two five acre, you think they’re prone to go for my five acre one?”

Steven Butala:                   Yes. I do.

Jill DeWit:                            “Is two years enough? Or five years of recent buyers enough?”

Steven Butala:                   Yes.

Jill DeWit:                            “Lots of things to test out here. Still cheaper than hiring out picks or drone or realtors or much of the other kinds of advertising like LandWatch, et cetera.”

Steven Butala:                   Like LandWatch. He’s exactly right. Let’s summarize. What he’s asking is is it a good idea to market property that you have for sale in a county to other landowners? And the answer is absolutely.

Jill DeWit:                            Right.

Steven Butala:                   I’m not gonna get into the Pareto principle. It’s a detailed concept about 80%, what is that concept?

Jill DeWit:                            20% of your output should produce 80% of the results. If you’re doing it right.

Steven Butala:                   Right, so it’s another way of saying it’s the 90/10 rule.

Jill DeWit:                            Work harder, work smarter. It’s work smarter, not harder.

Steven Butala:                   Yes.

Jill DeWit:                            That’s really it. I think that’s what’s Luke asking and I really love that. His questions about really spending a few extra minutes now or time now, researching and coming up with a strategic way to target the right potential buyers with these properties.

Steven Butala:                   Smart Jill. Very smart.

Jill DeWit:                            Thank very much. Thank you. Thank you. So that’s where he’s going. You know what’s so funny is that’s our whole group. That’s how we do everything.

Steven Butala:                   Yeah.

Jill DeWit:                            By the way, I’m only smart because I learned it from you. So thank you.

Steven Butala:                   Oh no, no, no.

Jill DeWit:                            But you should spend the time on the front end. It’s like what we do with our data and everything that we do. We spend the time on the front end so the rest of it goes smooth.

Steven Butala:                   Yeah. Here’s the thing, I think, Luke, and I can speak frankly and freely to you because you’re gonna do what you want anyway. And because you’re already good at this.

Jill DeWit:                            Right.

Steven Butala:                   And in a lot of ways I think you’re better at marketing than, let’s say, we are.

Jill DeWit:                            Right.

Steven Butala:                   Maybe not as good at acquisitions, but we’ll talk about that at the live event.

Jill DeWit:                            Yeah.

Steven Butala:                   ‘Cus he’s gonna be there.

Jill DeWit:                            Exactly.

Steven Butala:                   I think it would be very wise of you to hit ’em all. I would go into RealQuest, I would draw a circle around the property, a physical circle, and pull the data ‘cus it’s so cheap. At least a mile. Maybe four or five miles. And you’re gonna find out. We have done this in Santa Barbara county for the movie star ranch, we haven’t talked about it in a mile. Buy a ranch for seven or eight hundred thousand dollars and you sell it for a million. And the amount of letters that you have to send out to actually do that, it’s child’s play for you.

Jill DeWit:                            Right.

Steven Butala:                   You would send out probably 300 letters. And I know you’re used to sending out 30,000. Then the other thing to is that what I would really do, and I talk about this in Land Academy 2.0 and in House Academy, is get the thing on the MLS. If you’re gonna buy more expensive property at a really good price use Congress Realty. We have no affiliation with them, by the way. Look up Congress Realty and they have a fixed price listing for $300. It’s gonna work. It works for us 100% of the time. We’ve never failed at it.

Jill DeWit:                            When we’ve posted for land or houses.

Steven Butala:                   Right.

Jill DeWit:                            What was I gonna say? The other thing is marketing, I’m thinking of this too, the way Luke’s approaching this is like how we do in our marketing. And it’s a perfect scenario to do this. Do some A/B testing.

Steven Butala:                   Yeah. For these types of properties too you want to just use Facebook. Use Facebook groups, use Facebook business ads for the zip code that the property’s in.

Jill DeWit:                            Right.

Steven Butala:                   So everybody that is in that zip code, this is like point zero three cents a click. It’s so cost effective it’s silly. But to sell a property that’s way less than it’s actually worth. Driving the traffic through the MLS and using Facebook, which a video, not just a notice.

Jill DeWit:                            Yep.

Steven Butala:                   You’re on YouTube all over the place so that’ll work.

Jill DeWit:                            You’ll get it.

Steven Butala:                   That’s a great question. We live that every day, those two things.

Jill DeWit:                            Yep.

Steven Butala:                   Today’s topic: three ways to value real estate. This is the meat of the show. Before we started I said, “Man, we should look up the three ways.” Because I mean I know what they are.

Jill DeWit:                            I know.

Steven Butala:                   We, without walking around the office, say, “There’s only three ways to value real estate.” Jill and I looked ’em up because she thought we were gonna talk about our three ways, but there are the three ways that you learn about in school.

Number one is replacement cost. For land that’s a very interesting topic because there’s nothing to replace.

Jill DeWit:                            Exactly.

Steven Butala:                   So we’ll talk about that in a second. Number two is sales comparisons, which very much applies to land. And then number three is capitalization rate. It only applies to income producing property like an apartment building or a house for rent or a skyscraper or a parking garage.

Jill DeWit:                            Well I have a question on that.

Steven Butala:                   Let’s not cap right out right here ‘cus it doesn’t apply to what we’re saying. Go ahead.

Jill DeWit:                            Could I argue that if I seller finance a property could that be kind of a cap rate?

Steven Butala:                   Well, okay. Yes, well you could make that argument.

Jill DeWit:                            Thank you. ‘Cus a lot of people do that I didn’t mean to throw you under the bus or anything.

Steven Butala:                   It doesn’t apply to sales. It only applies to rent.

Jill DeWit:                            But if I …

Steven Butala:                   Here’s an example.

Jill DeWit:                            Oh, okay.

Steven Butala:                   Here’s a couple of examples.

Jill DeWit:                            Okay, so that’s why it’s no. If I leased the land to somebody knowing that maybe I lease it.

Steven Butala:                   Farm land has a cap rate.

Jill DeWit:                            Right. That’s it. Like I’m leasing the land so you can graze your cattle.

Steven Butala:                   Yep.

Jill DeWit:                            People do this all the time. But I still own it and I’m always gonna get it back. There’s gonna be a cap rate on that.

Steven Butala:                   In the simplest form here’s an example of a cap rate. You buy a house for $100,000 and you rent it out for $1000 a month.

Jill DeWit:                            Right.

Steven Butala:                   There’s no expenses in a perfect, beautiful world you charge a thousand and you make a thousand which never happens. You know the roof blows off, all kinds of stuff happens to make it not actually $12,000 a year.

Jill DeWit:                            Right.

Steven Butala:                   But in that perfect beautiful world it would be a 12 cap. It’s the amount of money that you make, that operating income, divided by the purchase price. So now we’ve got that out of the way ‘cus it doesn’t apply to land.

Jill DeWit:                            Okay. I’m gonna check that off. Check.

Steven Butala:                   You talk to anybody in commercial real estate, that’s the first thing they say, “Hey I’ve got an apartment building for sale.” Oh, what’s the cap rate? They don’t care about the asset itself.

Jill DeWit:                            No.

Steven Butala:                   Stuff right now, the lower the cap rate, the better it is for the seller. And the higher the cap rate the better it is for the buyer. And right now, I’ve never seen lower cap rates in my life than right now. Apartments are selling between and six percent cap rates, capitalization rate.

Jill DeWit:                            That seems low. Seems risky.

Steven Butala:                   Here’s why. Here’s why because you have to value an asset.

Jill DeWit:                            I don’t want a six cap, I want a 20 cap.

Steven Butala:                   Right. The more complicated it is to run something, like let’s say a long term care facility those are 12 to 14 capitalization rates.

Jill DeWit:                            Got it.

Steven Butala:                   Apartment building which, theoretically should be the owner doesn’t even know where it is kind of thing, they just put a management company in place, that’s like eight to 10 cap is where you want to buy it.

Jill DeWit:                            Got it.

Steven Butala:                   Here’s where the problem comes in. What if you have an apartment building that’s on the ocean and the asset value of the property itself is worth way more than the capitalization rate valuation.

Jill DeWit:                            Right.

Steven Butala:                   What do you do? You smile.

Jill DeWit:                            That’s true.

Steven Butala:                   You have a cocktail because you won.

Jill DeWit:                            Thank you. ‘Cus if it all goes sideways, everybody moves out it’s worth so much.

Steven Butala:                   My point is you want to win at all three way to value something.

Jill DeWit:                            I don’t know.

Steven Butala:                   So that apartment building that’s on the ocean, the replacement costs, that’s one way to value it. The value of the property is way more than the replacement cost. You won there.

Jill DeWit:                            Okay.

Steven Butala:                   ‘Cus of the land value. Number two, the capitalization rate, you won there. You would never sell it at the cap rate because it values it too low. It’s way under the actual replacement costs and the, what was the third one? The sales comparison. You want to try to win on all three is my point.

For land, all we care about, this is really the meat of the show.

Jill DeWit:                            That’s what I was trying to get to. We’re still talking about apartments and I’m just kind of lost right now.

Steven Butala:                   For land, all we care about is sales comparisons.

Jill DeWit:                            Right, because at the end of the day, that’s all that you can really kind of use.

Steven Butala:                   Not comparison, but comparison value. There’s two ways to define comparison value. Sold, completed sales. And existing sales. Existing for sale property. In the market that we have right now, those two numbers are really really close. In fact it doesn’t even matter. They’re so close, and I know this ‘cus we have actual data, which we share with everyone in Land Academy 2.0 and House Academy, that you can actually use for sale data as sold data. It’s the same thing, it’s like 98% of it. And you can calculate that. If you look at a market and everything’s selling for 100 grand, does it matter if it sells for $98,000 or 100,000? No. It doesn’t matter.

Jill and I just found out that in the Seattle market SFRs, houses, are increasing on an average by $20,000 a month. We’ve never seen that. That’s staggering. You buy a $100,000 house this month. The next month it’s worth 120, on average. That’s just, I can’t.

Jill DeWit:                            I hear you.

Steven Butala:                   Truly can’t believe that.

Jill DeWit:                            I hear ya.

Steven Butala:                   The whole point of this is there’s three ways to value real estate depending on the real estate type, but all we care about in the land is comparison value. And sold comps don’t matter as much as they used to. They used to really matter a lot. When I was a kid it would be, “Well you never want to actually look at … ” Like in a market like Detroit, is a good example. What’s listed is not selling for 98% of what it’s listed. It’s selling for like 80%. Then you really need to look at sold comps. Or if you have the number you can look at for sale property and multiply time point eight.

Bored yet? You are bored.

Jill DeWit:                            No I’m just fine. I’m just over here. Can I get you anything? Are you getting thirsty?

Steven Butala:                   Can I get you anything?

Jill DeWit:                            Are you thirsty?

Steven Butala:                   I am kind of thirsty from talking so much.

Jill DeWit:                            That’s what I’m saying, I’m just let’s, okay. It’s all good.

Steven Butala:                   Tell us a story, Jill.

Jill DeWit:                            No, it’s totally fine.

Steven Butala:                   Geeze.

Jill DeWit:                            It’s good. You know what, this is your show. There’s times when it’s that I have a lot to say and I can get it in there. And this time you have a lot to say and I can’t get anything in there. And that’s okay, this is your show.

Steven Butala:                   I’m done.

Jill DeWit:                            It’s all good. No, no, no.

Steven Butala:                   I rode my bike to work today.

Jill DeWit:                            I saw that.

Steven Butala:                   And that just makes me so happy.

Jill DeWit:                            I know. Do you want to explain your bike? Or do you want to do it in the after show?

Steven Butala:                   You know, this is what I was telling our number three kid recently, when you get to be older it’s the little things that matter. Like, yeah, yeah, I’m way over the fact that we make lot of money. I’m so far over that it’s silly. And I’m over the fact that a lot of people listen to the show. That’s their problem, not mine. But give me a new bike and I have a $13 frying pan. I have the best frying pan I’ve ever had in my life right now.

Jill DeWit:                            And you’re happy now.

Steven Butala:                   It costs $13 and I get more joy from that. Is everybody like that or is that just me? Or is that just weirdo?

Jill DeWit:                            I think it’s just you.

Steven Butala:                   What gives you a tremendous amount of joy.

Jill DeWit:                            I don’t …

Steven Butala:                   Is it the big things or the little things?

Jill DeWit:                            No, it’s not things.

Steven Butala:                   You seem to be really happy in your new car.

Jill DeWit:                            Well yeah, but you know what, I’m still most pleased by not things like time. And people. And experiences and doing stuff.

Steven Butala:                   Oh. Like going to a concert or something with your friends.

Jill DeWit:                            Yeah. Exactly, that’s what makes me most happy.

Steven Butala:                   That’s so mature of you.

Jill DeWit:                            Thank you.

Steven Butala:                   I wish I could be that mature.

Jill DeWit:                            Oh goodness. We’ll you’ve done it again, you’ve wasted another, I don’t know, 15 minutes or so listening to the Land Academy Show. Join us next time where we discuss the number one set back for land investors.

Steven Butala:                   And answer your questions posted on LandInvestors.com, it’s free.

Jill DeWit:                            You are not alone in your real estate ambition.

Steven Butala:                   Wow, you just wanted to end that, didn’t you. I understand.

Jill DeWit:                            Thank you. It was getting kind of way off topic, but again, that’s their problem. Share the fun by subscribing on iTunes or wherever you are listening. And while you’re at it, or you’re watching, you might be watching us on YouTube, while you’re at it please rate us there.

We are Steve and Jill.

Steven Butala:                   We are Steve and Jill. Information …

Jill DeWit:                            And inspiration.

Steven Butala:                   To buy undervalued property.

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