In the world of real estate investing, there are dozens of ways to determine what is the fair value of a property. But to keep it short, here’s a list and a brief description of the methods I use for my clients
- Comparable Sales Approach – The approach most Singaporeans like to use because not much calculation is involved and it’s comparison properties is tangible for everyone to see
- GRM (Gross Rent Multiplier) approach is commonly used for commercial properties but with a little tweak is also easily useable for residential properties
- Income Capitalisation Approach is used for rental properties but can also be used to determine the market value of the property you are thinking of buying
Comparable Sales Approach
The Comparable Sales approach compares a subject property with other similar properties that have been recently sold. After the comparison, you adjust the prices for each positive or negative feature of the property relative to the subject property and estimate the market value of the subject property from the adjusted sales prices of the other similar property
How to do the comparison?
Find properties that appear similar to the property you are thinking of buying in terms of property size, age, features, conditions, quality of construction, room count and floor plan.
- Find out the cost per square feet of each unit and
- Use the present value and future value of the other competition units to bring it up to the current valuation. This step is particularly important if there are large gaps in the period they were transacted. A view on how to calculate the present and future value can be found here.
- Adjust for differences to determine the market value of the property you are looking to buy. Compare the features of the properties and add and minus as and when required and determined by you.
Here is a list of features that might or might not influence the value of the real estate property you are looking to buy and it’s highly dependable on the owner’s preference.
- Location of nearby good schools
- How close is it to nearby shopping centres
- How close is it to nearby MRTs
- How close is it to nearby Bus-stops
- Following URA’s Master Plan for the particular district you are planning to buy in
- Amenities outside of Condo
- Facilities inside of Condo
- Brands used for Condo Bathrooms, Kitchen and Bedrooms
- Maintenance Fees
- Too many units or too few units?
- Too near MRT Station for noise?
- Too near expressways causing Jams?
- Not near MRT Station
- Not near bus stops
GRM Income Approach
You can start by looking for 3 other properties that are in the vicinity of the unit you are planning to buy. Try to find the ones with the same or very similar floor plan configuration for a more accurate calculation
- Find the GRM of each respective units by getting the Sales Price from local websites such as property guru, SRX or 99.co
- Estimate the annual rent you can expect to receive for the Unit you are planning to buy
- Multiply the estimated rent with the average of the 3 calculated GRMs of the nearby properties to estimate and see if the unit is planning to sell is undervalued, overvalued or at least fairly valued. Another option is to estimate the GRM for the unit you are looking to buy at a higher or lower level due to the fact that its freehold instead of leasehold, or nearer or further to the amenities e.t.c
V = The Market Value of the property you are looking to buy
NOI = Net operating income of the property (Rent Income – Property Tax – Property Insurance – Maintenance Fees – expected Maintenance and Repair – Vacancies Loss )
R = Rate of Return on Capital
You need to estimate the rate of return of capital for the other properties by finding out the current market value and NOI of the nearby units and finding an acceptable rate of return of Capital for your selected unit.
Thus, with the estimated Income rent, you can multiply it with the rate of return of capital of the surrounding units to find out the estimated market value of the unit you are planning to buy
As you can see, giving the same formulas to 10 different owners looking for a house in the same location can give 10 different valuations. The variables vary so much because different owners will give different weight to the multiple variables that are included in these formulas. For example, how near the public transport is will not matter to the owner who has his or her own private transport, the rent amount one can expect to receive for the GRM (Gross Rent Multiplier) Approach, or the rate of return used for the Income Capitalisation Approach, all of this are determined by you the owner and can affect the valuation answer.
The important thing is that for you, these 3 formulas, based on the amount of weight you give to the various variables, should give you 3 different answers that are very close to each other to determine for you the valuation you think you should be paying for the property.
Are you interested in finding more about how I approach buying properties for you to see if they are a great purchase decision or not? Or are you curious about this particular property but you are unsure if it’s a wise property purchase decision? How many people have been burned by bad property decisions in the past because they were misled by other real estate agents that don’t know any better?
This is where I come in. For all my clients and you, the reader of this post, I will draft out a comprehensive plans using these formulas to make sure you are buying a property that not only you are in love with but also one which will turn out to be a property that will be an appreciating asset in this tough Singapore Property Market.
Let’s have a quick non-obligatory chat or meet up about your real estate investment needs and let’s make sure you are paying a fair price for your next property purchase!
If you still haven’t found out what property you are looking to buy, let’s discuss further and I will aim to find a property which will be something you like and also serve as a capital appreciating asset for your real estate portfolio.
In the form below, let me know the unit you are thinking of buying or renting and let me work together with you to determine if the next property you are looking to buy is at a correct price.
If you are still deciding, just drop me a message and let me do the necessary scouting and calculation for your perfect next home!
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