Property Valuation: The Advice You Can’t Afford To Ignore

Diana Carson @GoodPlaceHQ

Keen GoodPlace readers will know that if there’s a topic that I like to yak about non-stop until armageddon, it’s property valuation. If you’ve been at this game for long then you’ll come to understand that there’s only one thing that you need to do in order to make money in property, and that is, (drum rolls)… find an undervalued property, and then sell it for a profit. That’s really it! Serious!

Of course, that’s really easier said than done, and I’ll be yanking your chain if I tell you that I’m going to hand you a magic widget that will tell a property’s true value in three seconds flat. But that’s the point really: if it’s that easy then the streets of KL would be filled by property millionaires already. You gotta put in the work, and this is great news for us, the non-lazy types. 😉

So here’s the deal:- if you’re willing to put in the effort, I can show you how, but if you’re the kind who’ll fall for the cookie cutter “How To Achieve Financial Freedom Working Ten Minutes A Day In Your Pyjamas” ebook scam then you should probably, well, just close this browser window and weep into your cereal bowl, reflecting on your naivete and indolence. For the rest of us, it’s time to roll up our sleeves and get into the ditches. Let’s go!

Monkey Wrenches In The Clockwork

As any professional valuer would tell you (and to justify her high fees), property valuation is somewhat like rocket science because of these three factors:-

  1. Sales are not frequent. Unlike kangkung (ha ha), properties don’t get sold very often. As such, finding the data for recent sale for a comparable property can be hard.  And to add to the problem, transaction data from JPPH are at least a couple of months old. Alternatively, you can get more recent data from agencies, but unlike JPPH, the data is not public, and not vetted by anyone else to be true and correct. Also, when the market is changing quickly, your >6-month-old JPPH data may well be out of date.
  2. Lots of dodgy data out there. This is also why I started GoodPlace – to be a provider of curated property market data. Because the property market is quite inefficient, access to accurate data is challenging. Of course, I have my own conspiracy theory (big players purposely blank out or publish fake data to make the market more opaque to their advantage), but I’ll save this possibly explosive expose for another time. 😉
  3. No two properties are truly “comparable”. This is what makes property special as an asset class. Cash is cash, Apple stock is Apple stock, but there are no two identical properties on the face of the earth. For example, you can have two units in a KLCC condo with wide pricing differentials – with one facing the Petronas Twin Towers and the other the neighbouring 30-year old apartment’s dirty water tangki (I’m exaggerating to make a point, but you get the idea).

There are also challenges associated with buyers and sellers who are influenced more by their emotions than by reason – again, this happens more often than most would realize. I’ve heard enough nonsense from sellers (“But I can’t sell at that price. Khai Yin, I grew up there!”)  and buyers (“But I can’t buy at that price. Khai Yin, it’s painted in Barney purple, goddammit!”) alike to (momentarily) give up on humanity.

The task for every agent, or any intermediary (like me), is to make sure that the buyer and seller meet at true, market price. The following are the most common ways one can use derive any property’s fair market value.

 The “Comp” Method

This is perhaps the most widely used method used by, well, almost everyone. There are two steps involved in the “Comp” (or “Comparison“) method – first, you’ll need to find a comparable (or “apple to apple”) property, and then make allowances for the differences between the two comparable properties.

Here’s also where a professional valuer would be able to justify the fees by wielding her exceptional skills in (1) identifying a highly comparable property which has been transacted recently, and (2) expertly making the adjustments based on her experience of performing valuation of similar cases in the past.

We have perhaps talked about the Comp Method to its proverbial death here at GoodPlace; if you haven’t done so already, read our uber popular Property Valuation PDF (as I always liked to say, the 10,000+ people to date who downloaded it can’t be wrong), and after that, check out this intermediate guide.

 The “Cashflow” Method

This method is specific to those who are investing in a property for cashflow (read this). First, you work out what we call the “RentCap ratio” which is defined as below –

RentCap equation

This is market data (which you can either get from your agent or make an estimation from property listings) which you can obtain from any reputable agent. Using this ratio, you can work out the Capital based on the income/year figure that the comparable property is able to generate.

The advantage of this approach over the Comp Method is that it’s more “direct” if you’re buying a property to be rented out since you can immediately tie it with your target yield in the context of your overall property investment strategy. For guidance on how to calculate yield, see this guide.

 The “Cost” Method

This is somewhat similar to the Comp Method above but with a slight twist. This is my favourite method when it comes to landed properties.

First, you determine how much it would cost to buy a nearby piece of land and to build a house on top of that land. Then, you assess the value of the property by “discounting” the value depending a couple of factors: age, condition of the building, etc.

When I was shopping around for a subsale landed unit in Puchong a year ago, I came across a couple of 22ft x 75ft terrace houses which were asking for $825,000 thereabouts (which I then confirmed through a JPPH search). Coincidentally, the developer of this same project was launching a new phase in an adjacent piece of land with comparable units (also 22ft x 75ft) selling for $818,000. That price differential was a sure indication of a good deal, and long story short – that was the only “research” that I did before I bought the place. 🙂

You Can’t Substitute A Good Valuer

Now it’s not my intention to encourage anyone do stick it up to their valuers; instead, apart of a good agent, it’s smart to have a good valuer in your team if you’re going to do this seriously.

Also, at the very least, as a buyer, if you have JPPH data (even if outdated) then you’ll at least have some baseline figures to use when you negotiate with the seller. Additionally, you can also use the methods above to do some back-of-the-envelope calculations to come up with a “maximum” price for any property which you can use to automatically filter out bad choices when you look at property classifieds.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

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