Remember: Please share this article if you found it enjoyable!
Beauty is in the eye of the beholder, and so is value.
Everyday, we, the human race, wakes up and chases value until we drop dead from exhaustion at night.
It doesn't matter if you are Donald Trump sitting on a multi billion dollar real estate portfolio or monk in a temple. We are all chasing value.
The real question is, what is value and what is valuable?
Of course, value is highly subjective and can be very hard to determine.
I always find it interesting to see how excited people are to buy new clothes. Shopping malls are filled with rabid people who are frantically purchasing new garments to wear and 6 months later the clothes that they purchased will be donated to charity or thrown away.
The value of the clothes goes from "I will sacrifice my financial health to wear this" to absolutely "I will never wear this piece of garbage again".
The same thing happens with electronics. The day that apple releases a new iPhone or iPod, people are camping out overnight to get their hands on the new gadget and will pay a mortgage payment to own it. 6 months later, the same people are giving the old iPhone to their dog or are using it as a coaster on a coffee table because the newer, thinner model came out.
But what about investments? Real estate? Houses?
What is the true intrinsic value of a house?
Most middle class people will say "our house is our biggest asset"!
Most middle class people will have nearly all of their net-worth tied up in their home.
But what is the house actually worth? What is any house actually worth?
The truth is, all real estate is actually worth $0. Land and buildings are completely worthless.
If you would like to see the true value of land and buildings, drive to Detroit where you can buy a city block for $1 and nobody wants to buy it. People who live in detroit would rather have a $1 Taco at Taco Bell than own the liability of a city block.
Land, real estate, houses, and buildings only get value when there is a USE for it and an END USER. The end user places his or her subjective value on the Real Estate and that is where values come from.
There are more people who want to live in Manhattan than Detroit. That's why Manhattan real estate is worth so much more than Detroit.
At the end of the day, Real Estate is only worth what the end user is willing to pay. However, one metric I have been using more and more of lately is dollars per square foot.
When comparing two similar properties, dollars per square foot is one of the best ways to measure the current and future value of the property.
For example, in Winnipeg right now, many houses trade in the $200-$250 per square foot range. If you can make a purchase at $100 per square foot in an area that is trading at $200-$250, you have an opportunity for profit.
Construction in Winnipeg for a new build is approximately $200 per square foot, so if you can purchase for less than $200, you are getting the house cheaper than it would be to build. Likewise, if you pay $270 per square foot, you are paying more than it costs to build.
When analyzing retail single family homes, dollars per square foot is an excellent metric for intrinsic value of the property.
BUY ON INTRINSIC VALUE, SELL ON EMOTIONAL VALUE
One of the easiest ways to profit in any market is to:
1) Buy on intrinsic value and
2) Sell on emotional value
There is always profit in markets that have irrational buyers. Irrational buyers means that irrational amounts of money are floating around looking for irrational products.
For example, the neighborhood River Heights in Winnipeg is a desirable neighborhood where people will pay irrational amounts of money to get their kids into the local schools. In River heights properties trade for $200-$250 per square foot, prices that are well above cost to build.
However, in up and coming parts of town, there are "rational" buyers who will only pay prices that less than construction prices. These areas will trade at $150-200 dollars per square foot.
The key for profit is to buy with on an intrinsic value, pump the value and sell to an emotional, irrational buyer. The irrational buyer is unconcerned with what they are actually paying. They WANT the product and perceive that they NEED it. If you have a business, you want irrational buyers. Irrational buyers are consumers who allow you to create massive spreads in your products and grow your business.
Do what you can to attract irrational buyers. When you capture these buyers, take great care of them, and they will take great care of you.
Thanks for reading,
By: Stefan Aarnio
P.S: Please share this article if you found it enjoyable!