Opinion – From Grain to Grain: If you evaluate property this way, you may end up paying dearly

Most investors fail to evaluate a property at the time of purchase and, on several occasions, end up paying dearly. This is because the traditional way of evaluating a property for acquisition is influenced by the mood of others and the sense of urgency. I comment on this failure and the care you need to take.

More than 90% of real estate valuations by individuals are performed relative to recent transactions. This is not wrong, but it carries a great risk.

Try to remember the last time you bought a property, or how you value your property today.

Possibly you’ve noticed the amount others are paying for real estate in your area or in your own building. As there is no real estate stock exchange, it is natural to fall into “I heard that they sold an apartment over there at the end of the street for R$ 13,000 per square meter” or “they told me that 241 was sold for more than R$ $700k last month”.

The fact that someone says there was a transaction is almost like a seal for you to pay too. Knowing that someone bought it, you soon imagine that someone might also want and pay for this property that you want.

This problem can even be leveraged when the doorman or the broker says that there are a lot of people visiting the property that you are interested in.

The sense of urgency gets in the way of the decision.

You start to think that if you don’t make an offer soon for a similar price to what they’re paying, you’re going to lose out. After all, who likes to lose?

This creates behavior similar to that known in auctions, called “winner’s curse”. The fear of losing an auction makes the buyer agree to pay a higher price than he should.

This effect is typical of booths at real estate launches.

There is one of these launches in my street that, out of curiosity, I visited at the beginning of the year.

According to the broker, at that time, they had very few units left. To this day the sales stand is there and the building is empty despite having been delivered in April.

Usually, before launching, builders even sell some units at a discount, as they know they can charge more later. The knowledge that others have paid usually supports almost any price charged.

Understand, it is not because others are paying a certain price at this moment that the asset is worth what is being traded.

This same argument applies to stocks traded on the stock exchange.

I’m not saying that valuing a property against recent transactions is wrong. Although it seems the simplest, this attitude demands a lot of care and greater depth of investigation.

There is a risk that others have overpaid and you are simply following the herd.

Individuals search and bargain more when investing in a small-value CDB than in real estate. Due to the large value and investment horizon, appraising a property should require much more time and effort.

So how should you value a property? Tomorrow I will answer this question.

Michael Viriato is an investment advisor and founding partner of Investor House

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