How to value real estate
Paying the right price for property
Let's face it. If you're trying to achieve financial freedom then at some point you're going to want to buy a property, either to live in or to rent out. Do you know what price you should be paying for that property? How do you know if you're paying over the odds? How do you know if you're getting a good deal on your property purchase?
You might not think that it matters. You'd be wrong. The cheaper that you can get the property the better as it will leave you with more cash/ credit (borrowing power) with which to make other purchases.
The honest answer is that you will never truly know if you got a good deal or not when buying a property. However there are important indicators.
One obvious indicator is what are other properties in the area selling for. You can easily find this out by checking in local estate agents or online sites such as Zoopla and Rightmove to get an idea of the sale price for similar properties. However, it may be that the whole area is over inflated and that prices are high simply because....other property prices in the area are high. So what else can you check to give you confidence that you're getting a good deal on your property?
Key property valuation metric
My key metric when looking for a property is the same general metric that professional property investors use. Professional property investors look at the price per square foot. This is an easy metric to calculate. On all property listings will be the square foot of the property and of course you already know the asking price of the property from the seller. Divide the property price by the square footage to give you the price per square foot.
How to use price per square foot
As you go around looking at different properties in the area in which you wish to buy your property constantly calculate the price per square foot of each property. Over time this will allow you to build up a knowledge of what land is really worth in the area. I'm not suggesting that you simply go for the cheapest price per square foot but it should act as an early warning system if you might be overpaying for the property. It also gives you very good negotiating power if you communicate how the price per square foot requested by the seller compares to other properties in the area.
When my fiancé and I were looking for a property we came across one in particular that we liked but seemed a little expensive for the size. The price per square foot was about £800. Let me explain that the property was in a more suburban part of London. However, £800 per square foot was steep for a property that was outside Centralish London (zones 1 and 2 on the underground for those interested). As such we were put off the purchase and ended up paying £480 per square foot for our property. We spent slightly more than the first property but got far more bang for our buck!
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