Investing In Real Estate

48 APPRAISAL: HOW TO DISCOVER GOOD VALUE
Other top-selling real estate authors advise would-be investors to
tell sellers, “You name the price, I’ll name the terms.” If the property
owner agrees to sell on easy terms (usually little or nothing down), the
buyer will agree to the seller’s price. “Who cares about the price you pay
today? What’s important is all that money you’re going to make when you
sell.” During the go-go boom years 2001–2006, I witnessed this mistake
hundreds of time in places as diverse as Dubai, Dublin, and San Diego.
MAKE MONEY WHEN YOU BUY, NOT JUST
WHEN YOU SELL
Long-term price increases (inflation, appreciation) will typically boost a
property’s eventual selling price. But before you can profit from the long
run, you must survive the short run. If you overpay, you may have to wait
five years (or more) for the market to catch up.
Even worse, during that wait, negative cash flows (the alligators)
may eat you alive. You lose the property. Someone else picks up the same
property at a much lower price. Even when investors do struggle through
a swampland of alligators, they still miss the rewards they could have
obtained if they had chosen a surer and safer route.
Want to profit? Buy right! Long-term successful investors make
money when they buy, not just when they sell. You reduce risk and increase
your chance for great returns when you buy properties at or (preferably)
below their market values. But this tactic requires that you know what
the term “market value” really means. (Note: When you buy at a bargain
price, you often pay less than market value for a property. However, I also
encourage you to buy “undervalued” properties. In this sense, undervalued
refers to all properties and/or locations that are loaded with strong
potential for gains that may result from a variety of sources. You’ll learn
how to find and evaluate “undervalued” properties in later chapters.)
WHAT IS MARKET VALUE?
To the uninformed, “appraised value,” “sales price,” and “market value”
all refer to the same concept. In fact, “Appraised value” could refer to an
insurance policy appraisal, a property tax appraisal, an estate tax appraisal,
or a market value appraisal. Sales price itself merely identifies the nominal
price) would equal $430, whereas a $28,000 loan ($35,000 purchase price) would
have required a payment of just $150 a month.